Trade in High-Tech Services:Understanding the Scope and Impact of Services Offshoring

J. Bradford JensenPeterson Institute

for International Economics

Prevalence and Impact of Trade in Services

• Diversity of opinion regarding the importance of trade in services– “Non-tradable”– “Is your job next?”– Long-run implications for standards of living

• To examine implications of trade in services, need detailed data– Weak statistical infrastructure relative to manufacturing– Need to creatively fill gaps and draw inferences

Tradable Services?

• Draw on a new empirical approach to identify tradable services– Identify service activities traded within U.S.– Infer that these activities potentially tradable internationally– Classify on industry and occupation

• Examine a number of features of these activities

• Examine establishment level microdata for select service industry exporters and non-exporters

• Relate results to manufacturing sector results

Road Map

• Describe new methodology

• Examine characteristics of traded service workers

• Examine characteristics of service firms that export

• Compare to manufacturing

• Conclude

Empirical Approach: Economic Geography

Industrial Concentration: Seattle

0

2

4

6

8

10

12

14

16

18

20

Aircraft andparts

Aerospaceproduct and

parts

Ship and boatbuilding

Fishing, hunting,trapping

Toys,amusements,and sporting

goods

Lo

cati

on

Qu

oti

ent

Empirical Approach: Economic Geography

Industrial Concentration: Seattle

0

2

4

6

8

10

12

14

16

18

20

Softwarepublishing

Aircraft andparts

Aerospaceproduct and

parts

Ship and boatbuilding

Fishing, hunting,trapping

Toys,amusements,and sporting

goods

Otherinformation

services

Electronicshopping and

mail-orderhouses

Lo

cati

on

Qu

oti

ent

Geographic Concentration of Industries

Geographic Concentration of Industries

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0 100 200 300 400 500 600 700 800 900 1000

NAICS Industry

Gin

i Co

eff

icie

nt

Ag Mining Utilities Construction Manufacturing Wholesale Retail Transportation Services Public Admin

Mfg EMP – 86% T

Prof Svc EMP –70% T

Ed/Health EMP –98% N-TOth Svc EMP –80% N-T

Ag/Min EMP –100% T

Employment Shares by Industry

Tradable Industries' Share of Employment

Non-Tradable60%

Mfg.12%

Ret./Whl.7%

Prof. Srv.14%

Pers. Srv.2%

Oth. Srv.1%

Pub. Adm.2%

Ag.1%

Min, Util, Con1%

Ed./Health0%

Geographic Concentration of Occupations

Geographic Concentration of Occupations

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

10 15 20 25 30 35 40 45 50 55 60

SOC Occupation

Gin

i Co

effi

cien

t

High-End Services Other Services Legal Other Services Production Related Military Specific

Mgt, Bus/Fin Ops, Arch/Eng EMP –65% T

Comp/Math EMP –100% T

Scientific EMP –84% T

Social Svc/Ed EMP –100% N-T

Prod EMP – 80% N-T

Tradable High-Tech Occupations in Non-Tradable Industries

Major Occupation Group Non-Tradable Industry Tradable IndustryBusiness and financial operations (13)

Non-Tradable Employment 757,406 945,273Share 14 18

Tradable Employment 1,487,523 2,176,721Share 28 41

Computer and mathematical operations (15)Tradable Employment 757,018 2,369,198

Share 24 76Architectural and Engineering (17)

Non-Tradable Employment 220,040 717,880Share 8 28

Tradable Employment 345,980 1,318,203Share 13 51

Life, physical, and social science (19)Non-Tradable Employment 85,095 105,527

Share 7 9Tradable Employment 426,274 551,382

Share 36 47

About 3 million workers in tradable high-tech occupations and non-tradable industries

Road Map

• Describe new methodology

• Examine characteristics of traded service workers

• Examine characteristics of service firms that export

• Compare to manufacturing

• Conclude

Earnings Differentials: Industry

Tradable vs. Non-Tradable Industry Incomes

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

All

Man

ufac

turin

g

Info

rmat

ion

Financ

e/In

sura

nce

Real E

stat

e

Prof/T

ech

Servic

es

Man

agem

ent

Admin/

Suppo

rt

Non-Tradable Tradable

35%

40%

Earnings Differentials: Occupation

Tradable vs. Non-Tradable Occupation Incomes

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

All

Man

agem

ent

Bus/F

in O

ps

Compu

ter/M

ath

Arch/

Eng

Scienc

esLe

gal

Health

Health

Sup

port

Non-Tradable Tradable

80%20%

Earnings Premia: Tradable Occupation and Industry

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

All Workers Workers in Prof/Bus Service Industries Workers in High-Tech Service Occupations

Per

cen

t D

iffe

ren

ce

Non-Tradable Industry and Tradable Occupation Tradable Industry and Non-Tradable Occupation Tradable Industry and Tradable Occupation

Road Map

• Describe new methodology

• Examine characteristics of traded service workers

• Examine characteristics of service firms that export

• Compare to manufacturing

• Conclude

Service Exporters

• Select 2-digit NAICS industries in the Census of Services include question on exports

• Information (51)

– Software, newspaper, periodical book publishers– Motion picture and sound recording industries– Broadcasting, internet, ISP and telecommunications

• Professional and Technical (54) – Legal, accounting, architectural, engineering, consulting,

marketing, and scientific

• Admin Support (56)– Administrative, temporary help, telemarketing and collection– Facilities management, security, janitorial, and landscaping

Service Exporters

NAICS Establishments Employment

Manufacturing Sector 31-33 350,828 14,699,536

Service Sector: (Export Question Asked) 1,259,566 19,721,420Information 51 137,678 3,736,061Professional, Scientific, and Technical Services 54 771,305 7,243,505Admin Support and Waste Mgt Services 56 350,583 8,741,854

Service Sector: (Export Question Not Asked) 1,438,567 23,260,394Educational Services 61 49,319 430,164Health Care and Social Assistance 62 704,526 15,052,255Corporate, Subsidiary, Regional Offices 55 36,833 2,453,991Arts, Entertainment, and Recreation 71 110,313 1,848,674Other Services (except Public Administration) 81 537,576 3,475,310

Source: 2002 Economic Census, Subject Series, from http://www.census.gov/econ/census02/guide/SUBSUMM.HTM

Service Exporters (con’t)

• Similar in nature to plant level manufacturing data– Establishments report exports of services – Have basic operating characteristics of the establishment:

• Employment • Sales • Payroll• Location

– Construct: • Average wage• Other input intensity• Labor productivity• Geographic concentration

Exporting Across Service Industries

Information Professional Admin Support Mfg51 54 56 31-33

Exporter 0.114 0.049 0.008 0.270Export Shipments 239 66 10 2,150Exports/Sales 0.010 0.008 0.002 0.040Sales ($000) 7,324 3,206 2,750 22,571Employment 31 26 58 80Average Wage ($000) 45 51 30 35Labor Productivity ($000) 207 135 87 192Other Inputs/Worker ($000) 162 84 57 158Geographic Concentration (Gini) 0.275 0.212 0.161 0.376

Service Sector -- by 2-digit NAICS Code

Exporting Across Service Industries

N=125 Exports/SalesShare

Exporters GiniLabor

ProductivityOther Inputs/

Worker Average Wage

Share Exporters 0.55479<.0001

Gini 0.43616 0.52284<.0001 <.0001

Labor Productivity 0.37735 0.49168 0.48887<.0001 <.0001 <.0001

Other Inputs/Worker 0.32229 0.42311 0.3833 0.949770.0002 <.0001 <.0001 <.0001

Average Wage 0.37415 0.44083 0.44902 0.74043 0.56375<.0001 <.0001 <.0001 <.0001 <.0001

Average Plant Size -0.03931 0.09516 0.06823 -0.11826 -0.19934 -0.047340.6634 0.2911 0.4496 0.189 0.0258 0.6001

Service Sector: (Export Question Asked)

Exporters Within Industries

N 390,377log(Employment) 41% 69% --

log(Sales) 117% 99% 26%

log(Average Wage) 54% 20% 13%

log(Labor Productivity) 73% 27% 26%

log(Other Inputs/Worker) 85% 30% 33%

6-digit NAICS Industry Controls No Yes YesState Controls No No YesEmployment No No Yes

Exporter Premia

Service Sector -- Export Question Asked

Road Map

• Describe new methodology

• Examine characteristics of traded service workers

• Examine characteristics of service firms that export

• Compare to manufacturing

• Conclude

What we know from Manufacturing

• Exporters are relatively rare and different from other plants– Exporters are larger, more capital intensive, pay higher wages,

more productive

• Changes in trade costs (policy and technology) cause a reallocation across and within industries– When trade costs fall, low productivity plants exit, relatively high

productivity non-exporters start exporting, exporters increase

exports

• Comparative advantage works both across and within industries– Low-wage, labor intensive production across and within industries

most vulnerable to low-wage import competition

Employment Growth

• Examine changes in industry employment growth

– Use County Business Pattern data for 1998-2004

N Mean Std. Dev.NAICS 50s Non-Tradable 13 0.145 0.123

Tradable 27 0.127 0.181

Conclusions

• Significant number of service activities are tradable

• Workers in tradable services have higher skills/earnings

• Service exporters are more fixed cost intensive and skill intensive across and within industries

• Tradable services do not appear to have different employment growth than non-tradable services

• Expect trade in services to have a similar impact as in manufacturing – Reallocation towards U.S. comparative advantage

resulting in productivity growth

Thank You

Next Steps

• What is traded?

– BEA microdata on outbound FDI

– Census microdata on service establishment exporters

– Detailed industry case studies with Sloan Industry Center researchers

• What is impact?

– Census microdata on service sector producer dynamics

– Census microdata on employment and wage dynamics

– Displaced Worker survey

What U.S. Industries are Low-Wage Countries Entering?

Evolution of Low-Wage Import Share, 1972-92

Evolution of Number of Products Share by SIC4 and Time, 1972-92

Number of Products Share