Offshoring Bias in U.S. Manufacturing: Implications for Productivity and Value Added

99 Pages Posted: 1 Mar 2012

See all articles by Susan N. Houseman

Susan N. Houseman

W.E. Upjohn Institute for Employment Research

Christopher Johann Kurz

Board of Governors of the Federal Reserve System

Paul Lengermann

Board of Governors of the Federal Reserve System

Benjamin R. Mandel

Federal Reserve Bank of New York

Date Written: September 22, 2010

Abstract

The rapid growth of offshoring has sparked a contentious debate over its impact on the U.S. manufacturing sector, which has recorded steep employment declines yet strong output growth -- a fact reconciled by the notable gains in manufacturing productivity. We maintain, however, that the dramatic acceleration of imports from developing countries has imparted a significant bias to the official statistics. In particular, the price declines associated with the shift to low-cost foreign suppliers are generally not captured in input cost and import price indexes. Although cost savings are a primary driver of the shift in sourcing to foreign suppliers, the price declines associated with offshoring are not systematically observed; this is the essence of the measurement problem. To gauge the magnitude of these discounts, we draw on a variety of evidence from import price microdata from the Bureau of Labor Statistics, industry case studies, and the business press. To assess the implications of offshoring bias for manufacturing productivity and value added, we implement the bias correction developed by Diewert and Nakamura (2009) to the input price index in a growth accounting framework, using a variety of assumptions about the magnitude of the discounts from offshoring. We find that from 1997 to 2007 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. Furthermore, although the bias from offshoring represents a relatively small share of real value added growth in the computer and electronic products industry, it may have accounted for a fifth to a half of the growth in real value added in the rest of manufacturing.

Keywords: Foreign outsourcing, TFP, price measurement, growth accounting

JEL Classification: O47, F40, L60

Suggested Citation

Houseman, Susan N. and Kurz, Christopher Johann and Lengermann, Paul and Mandel, Benjamin R., Offshoring Bias in U.S. Manufacturing: Implications for Productivity and Value Added (September 22, 2010). FRB International Finance Discussion Paper No. 1007, Available at SSRN: https://ssrn.com/abstract=1708176 or http://dx.doi.org/10.2139/ssrn.1708176

Susan N. Houseman

W.E. Upjohn Institute for Employment Research ( email )

300 South Westnedge Avenue
Kalamazoo, MI 49007-4686
United States

Christopher Johann Kurz

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551

Paul Lengermann

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Benjamin R. Mandel (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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