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Offshoring Bias in U.S. Manufacturing

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Abstract

In this paper, we show that the substitution of imported for domestically produced goods and services—often known as offshoring—can lead to overestimates of U.S. productivity growth and value added. We explore how the measurement of productivity and value added in manufacturing has been affected by the dramatic rise in imports of manufactured goods, which more than doubled from 1997 to 2007. We argue that, analogous to the widely discussed problem of outlet substitution bias in the literature on the Consumer Price Index, the price declines associated with the shift to low-cost foreign suppliers are generally not captured in existing price indexes. Just as the CPI fails to capture fully the lower prices for consumers due to the entry and expansion of big-box retailers like Wal-Mart, import price indexes and the intermediate input price indexes based on them do not capture the price drops associated with a shift to new low-cost suppliers in China and other developing countries. As a result, the real growth of imported inputs has been understated. And if input growth is understated, it follows that the growth in multifactor productivity and real value added in the manufacturing sector have been overstated. We estimate that average annual multifactor productivity growth in manufacturing was overstated by 0.1 to 0.2 percentage point and real value added growth by 0.2 to 0.5 percentage point from 1997 to 2007. Moreover, this bias may have accounted for a fifth to a half of the growth in real value added in manufacturing output excluding the computer and electronics industry.
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Suggested Citation

  • Susan N. Houseman & Christopher Kurz & Paul Lengermann & Benjamin Mandel, "undated". "Offshoring Bias in U.S. Manufacturing," Upjohn Working Papers and Journal Articles snh20112, W.E. Upjohn Institute for Employment Research.
  • Handle: RePEc:upj:weupjo:snh20112
    Note: Appears in Journal of Economic Perspectives 25(5): 111-132
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.25.2.111
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    References listed on IDEAS

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    1. Benjamin R. Mandel, 2010. "Heterogeneous firms and import quality: evidence from transaction-level prices," International Finance Discussion Papers 991, Board of Governors of the Federal Reserve System (U.S.).
    2. Robert C. Feenstra & Benjamin R. Mandel & Marshall B. Reinsdorf & Matthew J. Slaughter, 2013. "Effects of Terms of Trade Gains and Tariff Changes on the Measurement of US Productivity Growth," American Economic Journal: Economic Policy, American Economic Association, vol. 5(1), pages 59-93, February.
    3. Jerry Hausman, 2003. "Sources of Bias and Solutions to Bias in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 23-44, Winter.
    4. Robert C. Feenstra & Robert E. Lipsey & Lee G. Branstetter & C. Fritz Foley & James Harrigan & J. Bradford Jensen & Lori Kletzer & Catherine Mann & Peter K. Schott & Greg C. Wright, 2010. "Report on the State of Available Data for the Study of International Trade and Foreign Direct Investment," NBER Working Papers 16254, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Elisabetta Magnani, 2012. "Vertical disintegration and training: evidence from a matched employer–employee survey," Journal of Productivity Analysis, Springer, vol. 38(2), pages 199-217, October.
    2. Martin Schneider, 2014. "Labor Productivity Developments in Austria in an International Perspective," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 13-35.
    3. Harchaoui, Tarek M., 2012. "The Europe-U.S. Retail Trade Productivity Gap in a Rear-view Mirror," GGDC Research Memorandum GD-127, Groningen Growth and Development Centre, University of Groningen.
    4. Etienne Gagnon & David López-Salido & Jason Sockin, 2017. "The Cyclicality of Sales, Regular, and Effective Prices: Business Cycle and Policy Implications: Comment," American Economic Review, American Economic Association, vol. 107(10), pages 3229-3242, October.
    5. Feenstra, Robert C. & Jensen, J. Bradford, 2012. "Evaluating estimates of materials offshoring from US manufacturing," Economics Letters, Elsevier, vol. 117(1), pages 170-173.
    6. Ng, Travis, 2014. "Bailing outsourcing," Journal of Comparative Economics, Elsevier, vol. 42(4), pages 983-993.
    7. Ana Aizcorbe & Tina Highfill, 2015. "Medical Care Expenditure Indexes for the US, 1980-2006," BEA Working Papers 0121, Bureau of Economic Analysis.
    8. David Byrne & Brian K. Kovak & Ryan Michaels, 2013. "Price and Quality Dispersion in an Offshoring Market: Evidence from Semiconductor Production Services," NBER Working Papers 19637, National Bureau of Economic Research, Inc.
    9. Campbell, Douglas L., 2016. "Measurement matters: Productivity-adjusted weighted average relative price indices," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 45-81.
    10. Campbell, Douglas L & Pyun, Ju Hyun, 2014. "Through the Looking Glass: A WARPed View of Real Exchange Rate History," MPRA Paper 55870, University Library of Munich, Germany.
    11. Benjamin R. Mandel, 2013. "Chinese exports and U.S. import prices," Staff Reports 591, Federal Reserve Bank of New York.
    12. Jan Hogrefe & Yao Yao, 2016. "Offshoring and labor income risk: an empirical investigation," Empirical Economics, Springer, vol. 50(3), pages 1045-1063, May.
    13. Douglas L. Campbell, 2013. "Relative Prices, Hysteresis, and the Decline of American Manufacturing," 2013 Papers pca584, Job Market Papers.
    14. Robert C. Feenstra & Benjamin R. Mandel & Marshall B. Reinsdorf & Matthew J. Slaughter, 2013. "Effects of Terms of Trade Gains and Tariff Changes on the Measurement of US Productivity Growth," American Economic Journal: Economic Policy, American Economic Association, vol. 5(1), pages 59-93, February.
    15. Kliesen, Kevin L. & Tatom, John A., 2013. "U.S. manufacturing and the importance of international trade: it’s not what you think," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 27-50.
    16. Fukao, Kyoji & Arai, Sonoe, 2014. "Biases to Manufacturing Statistics from Offshoring: Evidence from Japan," RCESR Discussion Paper Series DP14-2, Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University.

    More about this item

    Keywords

    offshoring; manufacturing; input pricing; import price measurement; productivity; statistics;

    JEL classification:

    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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