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

Upjohn Author ORCID Identifier

https://orcid.org/0000-0003-2657-8479

Publication Date

9-1-2010

Series

International Finance Discussion Papers Number 1007

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.

Publisher

Board of Governors of the Federal Reserve System

Published Version

Article in Journal of Economic Perspectives 25(2): 111-132 (2011)

Issue Date

September 2010

Sponsorship

Supported with funding from the Bureau of Economic Analysis and the Alfred P. Sloan Foundation

Subject Areas

INTERNATIONAL ISSUES; Globalization; Offshoring; Productivity measurement; ECONOMIC DEVELOPMENT; Industry studies

Share

COinS
 

Citation

Houseman, Susan N., Christopher J. Kurz, Paul A. Lengermann, and Benjamin R. Mandel. 2010. "Offshoring Bias in U.S. Manufacturing: Implications for Productivity and Value Added." International Finance Discussion Papers, Number 1007. Washington, DC: Board of Governors of the Federal Reserve Board.