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The Labor Market Effects of Offshoring by U.S. Multinational Firms: Evidence from Changes in Global Tax Policies

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  • Brian K. Kovak
  • Lindsay Oldenski
  • Nicholas Sly

Abstract

Estimating the causal effect of offshoring on domestic employment is difficult because of the inherent simultaneity of multinational firms? domestic and foreign affiliate employment decisions. In this paper, we resolve this identification problem using variation in Bilateral Tax Treaties (BTTs), which reduce the effective cost of offshore activity by mitigating double taxation. We derive a panel difference-in-differences research design from a standard model of multinational firms, demonstrating the simultaneity problem and showing how to resolve it using BTTs as an instrument for offshore employment. We confirm that new treaty implementation is uncorrelated with existing employment trends, and use Bureau of Economic Analysis data on U.S. multinational firms to measure the domestic employment effects of offshore activity. {{p}} Overall, we find modest positive effects of offshore activity on domestic employment. A 10 percent BTT induced increase in affiliate employment drives a 1.8 percent increase in employment at the U.S. parent firm, with smaller effects at the industry and regional levels. Underlying these results is substantial heterogeneity based on offshoring margin and firm organizational structure. For example, increased foreign affiliate activity in vertically oriented multinational firms drives declining employment among non-multinationals in the same industry, and multinational firms opening new affiliates exhibit much smaller domestic employment growth than those expanding existing affiliates. Throughout the analysis, OLS estimates are much larger than the IV estimates, consistent with upward simultaneity bias. Overall, our results indicate that greater offshore activity raises net employment by U.S. firms, albeit with underlying job loss and reallocation of workers.

Suggested Citation

  • Brian K. Kovak & Lindsay Oldenski & Nicholas Sly, 2017. "The Labor Market Effects of Offshoring by U.S. Multinational Firms: Evidence from Changes in Global Tax Policies," Research Working Paper RWP 17-12, Federal Reserve Bank of Kansas City, revised 20 Dec 2017.
  • Handle: RePEc:fip:fedkrw:rwp17-12
    DOI: 10.18651/RWP2017-12
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    References listed on IDEAS

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    1. Chisik, Richard & Davies, Ronald B., 2004. "Asymmetric FDI and tax-treaty bargaining: theory and evidence," Journal of Public Economics, Elsevier, vol. 88(6), pages 1119-1148, June.
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    4. William W. Olney, 2012. "Offshoring, immigration, and the native wage distribution," Canadian Journal of Economics, Canadian Economics Association, vol. 45(3), pages 830-856, August.
    5. Bruce A. Blonigen & Lindsay Oldenski & Nicholas Sly, 2019. "The Differential Effects of Bilateral Tax Treaties," World Scientific Book Chapters, in: Foreign Direct Investment, chapter 7, pages 235-263, World Scientific Publishing Co. Pte. Ltd..
    6. Jose L. Groizard & Priya Ranjan & Antonio Rodriguez‐Lopez, 2015. "Trade Costs And Job Flows: Evidence From Establishment‐Level Data," Economic Inquiry, Western Economic Association International, vol. 53(1), pages 173-204, January.
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    10. Monarch, Ryan & Park, Jooyoun & Sivadasan, Jagadeesh, 2017. "Domestic gains from offshoring? Evidence from TAA-linked U.S. microdata," Journal of International Economics, Elsevier, vol. 105(C), pages 150-173.
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    Cited by:

    1. R. Cezar & T. Gigout & F. Tripier, 2020. "Cross-border investments and uncertainty: Firm-level evidence," Post-Print hal-02877942, HAL.
    2. ADACHI Daisuke & SAITO Yukiko, 2020. "Multinational Production and Labor Share," Discussion papers 20012, Research Institute of Economy, Trade and Industry (RIETI).
    3. Andrew B. Bernard & Teresa C. Fort & Valerie Smeets & Frederic Warzynski, 2020. "Heterogeneous Globalization: Offshoring and Reorganization," NBER Working Papers 26854, National Bureau of Economic Research, Inc.
    4. Gigout, Timothee, 2019. "Firm dynamics in an global and uncertain economy," MPRA Paper 96569, University Library of Munich, Germany, revised 16 Oct 2019.
    5. Stepanok, Ignat, 2018. "FDI and unemployment, a growth perspective," IAB Discussion Paper 201811, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    6. Michael Landesmann & Sandra M. Leitner, 2018. "Immigration and Offshoring," wiiw Working Papers 156, The Vienna Institute for International Economic Studies, wiiw.

    More about this item

    Keywords

    Multinational Firms; FDI; Offshoring; Employment;

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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