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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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  • Nicholas Sly

    (Federal Reserve Bank of Kansas City)

  • Lindsay Oldenski

    (Georgetown University)

  • Brian Kovak

    (Carnegie Mellon University)

Abstract

Estimating the causal effect of offshoring on domestic employment is notoriously difficult because of the inherent simultaneity of domestic and foreign affiliate employment decisions. We use a model of endogenous offshoring to characterize this simultaneity and to derive an instrumental variables strategy allowing us to estimate the impact of offshore hiring on domestic employment. Our IV strategy exploits variation in offshoring costs across countries, industries, and time that results from the implementation of bilateral tax treaties, and uses Bureau of Economic Analysis (BEA) firm-level data for U.S. multinationals across two decades. We confirm that new treaties are unrelated to existing employment trends, and proceed to estimate the effects of offshoring on U.S. employment within multinational firms, industry-wide, and within local labor markets. We find that a 10 percent increase in foreign affiliate employment increases domestic U.S. employment for existing multinational firms by 1.4 percent, consistent with increased scale of production following a decline in global production costs. However, industry-wide U.S. employment increases by only one-third as much, as the opening of new offshore production facilities generates substitution for workers that had been hired domestically. We estimate slightly larger effects for local labor markets, suggesting there are possible spillovers across industries in the same location. Throughout the analysis, OLS estimates, which fail to account for the simultaneity of domestic and offshore employment, are more than 3 times larger than the preferred IV estimates. Overall, our results indicate that greater offshore activity raises net employment by U.S. firms.

Suggested Citation

  • Nicholas Sly & Lindsay Oldenski & Brian Kovak, 2017. "The Labor Market Effects of Offshoring by U.S. Multinational Firms: Evidence from Changes in Global Tax Policies," 2017 Meeting Papers 535, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:535
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    File URL: https://economicdynamics.org/meetpapers/2017/paper_535.pdf
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, January.
    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. Bruce A. Blonigen & Lindsay Oldenski & Nicholas Sly, 2014. "The Differential Effects of Bilateral Tax Treaties," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 1-18, May.
    7. Monarch, Ryan & Park, Jooyoun & Sivadasan, Jagadeesh, 2013. "Gains from Offshoring? Evidence from U.S. Microdata," Working Papers 635, Research Seminar in International Economics, University of Michigan.
    8. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769, October.
    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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