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Multinational Corporations, Outsourcing, and American Wage Divergence

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  • Matthew J. Slaughter
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    Abstract

    Many economists studying America's wage divergence in the 1980's have concluded that its primary cause was a within-industry shift in relative labor demand toward the more-skilled. Following the modeling framework and empirical methods developed in Slaughter (1993), in this paper I try to determine the extent to which outsourcing by multinational corporations contributed to this labor-demand shift. To do this, I use data from the Bureau of Economic Analysis (BEA) on U.S. manufacturing multinationals in the 1980's. My main finding is that the data are inconsistent with U.S. multinationals having outsourced heavily in the 1980's. First, I construct a set of stylized facts about the employment, investment, and production patterns of these firms. I find that most of these facts are inconsistent with widespread outsourcing. Second, to test more rigorously whether these firms substitute between U.S. and foreign production labor I estimate their factor-price elasticities of demand in a translog-cost-function specification. I find that home and foreign production labor at best seem to be weak price substitutes and in fact may be price complements. Taken together, these findings indicate that multinational outsourcing contributed very little to rising wage inequality.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5253.

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    Date of creation: Sep 1995
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    Publication status: published as (Published as "Production Transfer Within Multinational Enterprises and American Wages") Journal of International Economics (April 2000): 449-472.
    Handle: RePEc:nbr:nberwo:5253

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    1. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Papers, California Davis - Institute of Governmental Affairs 95-14, California Davis - Institute of Governmental Affairs.
    2. Borjas, G.J. & Freeman, R.B. & Katz, L.F., 1991. "On The Labor Market Effects Of Immigration And Trade," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1556, Harvard - Institute of Economic Research.
    3. Anderson, Richard G & Thursby, Jerry G, 1986. "Confidence Intervals for Elasticity Estimators in Translog Models," The Review of Economics and Statistics, MIT Press, vol. 68(4), pages 647-56, November.
    4. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 9(2), pages 169-189, Spring.
    5. Paul Krugman, 1995. "Growing World Trade: Causes and Consequences," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 327-377.
    6. Robert E. Baldwin, 1995. "The Effects of Trade and Foreign Direct Investment on Employment and Relative Wages," OECD Jobs Study Working Papers, OECD Publishing 4, OECD Publishing.
    7. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, Elsevier, vol. 33(1-2), pages 57-76, August.
    8. Robert E. Lipsey, 1994. "Outward Direct Investment and the U.S. Economy," NBER Working Papers 4691, National Bureau of Economic Research, Inc.
    9. Steven J. Davis, 1992. "Cross-Country Patterns of Change in Relative Wages," NBER Working Papers 4085, National Bureau of Economic Research, Inc.
    10. George J. Borjas & Valerie A. Ramey, 1993. "Foreign Competition, Market Power and Wage Inequality: Theory and Evidence," NBER Working Papers 4556, National Bureau of Economic Research, Inc.
    11. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
    12. Richard B. Freeman, 1991. "How Much Has De-Unionisation Contributed to the Rise in Male Earnings Inequality?," NBER Working Papers 3826, National Bureau of Economic Research, Inc.
    13. Irving B. Kravis & Robert E. Lipsey, 1988. "The Effect of Multinational Firms' Operations on Their Domestic Employment," NBER Working Papers 2760, National Bureau of Economic Research, Inc.
    14. Jeffrey D. Sachs & Howard J. Shatz, 1994. "Trade and Jobs in Manufacturing," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 1-84.
    15. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(2), pages 367-97, May.
    16. Eli Berman & John Bound & Zvi Griliches, 1993. "Changes in the Demand for Skilled Labor within U.S. Manufacturing Industries: Evidence from the Annual Survey of Manufacturing," NBER Working Papers 4255, National Bureau of Economic Research, Inc.
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