Offshoring, international trade, and American workers.

• Author: Harrison, Ann
• Position: Research Summaries

In 1982, only one out of four employees of U.S. multinationals was located offshore, and over 90 percent of those employees were in industrial countries. By 2007, the share of offshore employment had reached 44 percent, and the majority of those jobs were in low-income countries. These trends in offshoring are mirrored in the statistics on international trade: over the past two decades imports from low-wage countries have more than doubled. (1)

Over this same time period, U.S. employment in the manufacturing sector fell sharply and income inequality increased. The downward trend in U.S. manufacturing employment began with the multinationals and coincided with their expansion offshore: between 1982 and 1999 U.S. based multinationals reduced employment domestically by 4 million workers. Our research is motivated by these parallel developments and seeks to understand the implications for American workers.

Are U.S. Based Multinationals Exporting Jobs?

This question has always been of interest to policymakers and is arguably more important now than ever before. Accordingly, there is no shortage of academic research on this topic. (2) The problem is that the answer to the question seems to change depending on the study. Brainard and Riker (3) find that labor employed by overseas affiliates substitutes at the margin for labor employed by parents at home, but they emphasize that the results differ depending on geographic location. In particular, they emphasize strong substitution between workers in developing countries, such as between workers in countries like Mexico and China. More recently, Desai, Foley, and Hines (4) have shown that increases in employment abroad are positively correlated with employment at home. They interpret this as evidence that expansion abroad by U.S. based multinationals leads to job creation at home.

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Our research examines this seemingly contradictory evidence in an attempt to bring closure to this debate. We begin by establishing that the relationship between multinational employment at home and abroad changes depending on the location of U.S. multinational activity. (5) We show that for affiliates in high-income countries, there is a positive correlation between employment at home and abroad, suggesting that foreign employment of U.S. multinationals may be complementary to domestic employment (Figure 1). However, we also establish that this positive correlation between employment in the United States and employment in high income locations is driven by a contraction in employment in both locations, not by employment growth.

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For firms that operate in developing countries, however, employment contractions in the United States are matched by affiliate employment growth in low income locations. As shown in Figure 2, workers in low-income countries appear to be substitutes for U.S. workers in several highly visible industries, including computers, electronics, and transportation.

We can explain these apparently conflicting results by distinguishing between the different motives for foreign investment. (6) Markusen and Maskus (7) show how different incentives for foreign investment lead to different organizational structures, which should produce different degrees of substitution between employment at home and abroad. Horizontal multinationals (H-FDI), defined as firms that produce the same products in different locations, are primarily motivated to locate abroad by trade costs. For H-FDI, investment abroad substitutes for parent exports, and foreign-affiliate employment should substitute for home employment. Vertically integrated enterprises (V-FDI) are motivated to locate different components of production in different locations by factor price differences...