Outsourcing of Services, Imported Materials and the Demand for Heterogeneous Labour: An Application of a Generalised Box-Cox Function

Abstract

Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp0051.pdf A non-technical summaryOver the last decades manufacturers outsourced service inputs and shared resources with competitors. As a result service inputs have been the fastest growing input factor in German manufacturing, followed by imported materials and highly skilled labour. Based on input-output tables intermediate services and imported materials both at constant prices rose by 4.7 and 4.2 percent per year between 1978 and 1990. Most of the rise in intermediate services as a factor of production in manufacturing can be attributed to the growing importance of business services representing 45 percent of total intermediate services in 1990 compared to 35 percent in 1978. Within business services temporary personal supply services, consulting, legal service, accounting seems to be the fastest growing business services. For instance, between 1978 and 1998 the number of workers in personal supply services increased by 11 percent per year, the highest employment growth rate among all business service industries.For the U.S several empirical studies provide evidence that manufacturing firms contract out business services to realize labour cost savings. In particular, low skilled tasks are outsourced because manufacturing firms have no opportunity to pursue a different compensation strategy between skilled and unskilled workers. Most studies, however, focus on international outsourcing proxied by directly imported intermediate inputs or imported intermediate inputs purchased from the same two digit industry as the product being produced. Furthermore, outsourcing of services may also have an impact on the demand for skilled workers. Usually, outsourcing of services is motivated by the access to new skills. Therefore, it is also likely that skilled workers are replaced by outsourcing of services.This study constitutes the first attempt to examine the effects of the increasing use of service inputs as well as imported materials on heterogeneous labour demand. We analyse the substitution possibilities more completely than in previous studies. Furthermore, we formulate a new variant of a Box-Cox cost function nesting both the normalised quadratic and the translog functional form. The hypothesis that the increasing use of services in manufacturing contributed to the shift away from unskilled labour has only weak support. However, we found a significant substitution relationship between high-skilled labour and intermediate services. Th...

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