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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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  • Kovak, Brian K.
  • Oldenski, Lindsay
  • Sly, Nicholas

    (Federal Reserve Bank of Kansas City)

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

  • Kovak, Brian K. & Oldenski, Lindsay & Sly, Nicholas, 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.
  • Handle: RePEc:fip:fedkrw:rwp17-12
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    File URL: https://doi.org/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.
    2. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, March.
    3. 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..
    4. 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.
    5. Pol Antràs & Teresa C. Fort & Felix Tintelnot, 2017. "The Margins of Global Sourcing: Theory and Evidence from US Firms," American Economic Review, American Economic Association, vol. 107(9), pages 2514-2564, September.
    6. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    7. Ronald B. Davies & Pehr-Johan Norbäck & Ayça Tekin-Koru, 2009. "The Effect of Tax Treaties on Multinational Firms: New Evidence from Microdata," The World Economy, Wiley Blackwell, vol. 32(1), pages 77-110, January.
    8. 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.
    9. 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.
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    Cited by:

    1. Michael Landesmann & Sandra M. Leitner, 2018. "Immigration and Offshoring," wiiw Working Papers 156, The Vienna Institute for International Economic Studies, wiiw.
    2. repec:iab:iabdpa:201811 is not listed on IDEAS

    More about this item

    Keywords

    Offshoring; Employment; FDI; Multinational Firms;

    JEL classification:

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

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