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The Labor Market Effects of Offshoring by U.S. Multinational Firms

Brian K. Kovak, Lindsay Oldenski, Nicholas Sly

NBER Working Paper No. 23947
Issued in October 2017, Revised in October 2018
NBER Program(s):International Trade and Investment, Labor Studies

Previous papers on the labor market effects of offshoring have found very different results in terms of both the sign and magnitude of the relationship. This is in large part because offshoring encompasses many different activities and likely affects different types of firms in different ways. We first present a model of global sourcing to show how the relationship between offshoring and domestic employment can be expected to vary within and across different types of firms. We then use firm-level data on offshoring by U.S. MNEs from the Bureau of Economic Analysis (BEA) to test the model’s predictions at the firm, industry, and regional levels. Because the inherent simultaneity of multinational firms’ domestic and foreign affiliate employment decisions complicates causal identification, we introduce a new instrument for offshore employment: Bilateral Tax Treaties (BTTs). These treaties reduce the effective cost of offshore activity and their implementation is uncorrelated with existing employment trends. We find substantial heterogeneity in effects based on offshoring margin and firm organizational structure. 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. In contrast, 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. Overall, our results indicate that greater offshore activity modestly raises net employment by U.S. firms, albeit with underlying job loss and employment reallocation.

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Document Object Identifier (DOI): 10.3386/w23947

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