The Labor Market Effects of Offshoring by U.S. Multinational Firms: Evidence from Changes in Global Tax Policies

Abstract

Estimating the causal effect of offshoring on domestic employment is difficult because of the inherent simultaneity of multinational firms' domestic and foreign affiliate employment decisions. In this paper, we resolve this identification problem using variation in Bilateral Tax Treaties (BTTs), which reduce the effective cost of offshore activity by mitigating double taxation. We derive a panel difference-indifferences research design from a standard model of multinational firms, demonstrating the simultaneity problem and showing how to resolve it using BTTs as an instrument for offshore employment. We confirm that new treaty implementation is uncorrelated with existing employment trends, and use Bureau of Economic Analysis data on U.S. multinational firms to measure the domestic employment effects of offshore activity. Overall, we find modest positive effects of offshore activity on domestic employment. A 10 percent BTTinduced increase in affiliate employment drives a 1.8 percent increase in employment at the U.S. parent firm, with smaller effects at the industry and regional levels. Underlying these results is substantial heterogeneity based on offshoring margin and firm organizational structure. For example, increased foreign affiliate activity in vertically oriented multinational firms drives declining employment among non-multinationals in the same industry, and multinational firms opening new affiliates exhibit much smaller domestic employment growth than those expanding existing affiliates. Throughout the analysis, OLS estimates are much larger than the IV estimates, consistent with upward simultaneity bias. Overall, our results indicate that greater offshore activity raises net employment by U.S. firms, albeit with underlying job loss and reallocation of workers.

Difference-in-Differences with Variation in Treatment Timing

“…Almond, Hoynes, and Schanzenbach 2011, Bailey and Goodman-Bacon 2015); when treatments vary by firm studies include industry-by-year fixed effects (e.g. Kovak, Oldenski, and Sly 2018).…”

Cross-border investments and uncertainty: Firm-level evidence

“…We add a vector of lagged affiliate characteristics X a,t−1 to control for its financial constraint and investment opportunities: the size of the affiliate assets and its returns on investment. Finally, we follow Kovak et al (2017) for the fixed effect structure: γ a is an affiliate fixed effect that allows us to control for affiliates unobservable time-invariant characteristics, including its country and sector; γ t × γ k is a year by sector fixed effect that captures the business cycle of the sector.…”

Salvation by good works? Offshoring, corporate philanthropy, and public attitudes toward trade policy

“…It could also be that CSR causes an entirely different set of people to like free trade that would not have otherwise done so, generating offsetting effects. Our research design cannot conclusively distinguish one causal mechanism from the other, but we describe aspects of our findings that are suggestive in this regard.13 American labor is displaced by foreign labor, but cheaper labor can incentivize more production and, through scale effects, a potentially offsetting increase in local employment (seeKovak et al, 2017; see alsoGrossman & Rossi-Hansberg, 2008;Harrison & McMillan, 2011). Econometric work on the topic includes work suggesting the offshoring depresses wages in the source country(Ebenstein, Harrison, & MacMillan, 2014), work suggesting minimal(Liu & Trefler, 2008) and even positive effects(Desai, Foley, & Hines, 2009;Kovak et al, 2017).…”