Offshoring and manufacturing

Here is a new paper from the W.E. Upjohn Institute for Employment ResearchOffshoring and the State of American Manufacturing. Written by Susan Houseman of the Upjohn Institute and Christopher Kurz, Paul A. Lengermann and Benjamin Mandel of the staff of the Federal Reserve Board, the paper take a new look at the productivity and output numbers and finds them lacking:

First, the robust output and productivity growth in manufacturing is largely attributable to one industry: computer and electronic products manufacturing. The average annual growth rate of value added in manufacturing excluding computers–which accounted for about 90 percent of manufacturing value added throughout the period–was less than a third of the published growth rate for all manufacturing. As a result, the aggregate numbers do not accurately characterize trends in most of manufacturing.
Second, the price declines associated with the shift to low-cost foreign suppliers generally are not captured in price indexes. The problem is analogous to the widely discussed problem of outlet substitution bias in the literature on the Consumer Price Index (CPI). Just as the CPI fails to capture lower prices for consumers due to the entry and expansion of big-box retailers like Wal-Mart, import price indexes and the intermediate input price indexes based on them do not capture the price drops associated with a shift to new low-cost suppliers in China and other developing countries. A bias to the input price index from offshoring implies that the real growth of imported inputs has been understated. And if input growth is understated, it follows that the growth in MFP and real value added have been overstated.

Bottom line:

These biases have implications not only for the industry statistics, but also for the analyses based on them. Because the growth of these imports will be understated in real terms, offshoring will, at least to some degree, manifest itself as mismeasured productivity gains. As a result, studies that endeavor to assess the impact of low-cost imports on the American economy and its workers may well understate the true effects.

As with our efforts to keep up with measurement of the shift to an intangible economy, so too must we continue to improve our economic statistics on the affects of globalization. Otherwise we will make bad policy decisions.

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