Service Offshoring Raises U.S. Productivity

"From 1992 to 2000, 'service offshoring" accounted for around 11 percent of the productivity growth in U.S. manufacturing industries."

It is increasingly common today that when U.S. consumers seek out help with their American-made product, the person handling the call or Internet chat session is sitting at a desk on the other side of the world. This is just one example of the growing tendency in the U.S. manufacturing sector to "outsource" key services -- which can include, among other things, technical support, medical claims processing, and software development -- to providers in other countries.

In Service Offshoring and Productivity: Evidence from the United States (NBER Working Paper No. 11926), co-authors Mary Amiti and Shang-Jin Wei note that service outsourcing is doing more than fueling an economic boom in the tech-savvy provinces of India. It is also playing a major role in one of the big economic stories of the last decade: the surging productivity of American manufacturing firms. They find that American firms are getting bigger boosts in productivity from outsourcing services to overseas providers than from the more familiar practice of turning to foreign concerns for manufacturing materials, such as parts and packaging.

Amiti and Shang-Jin find that from 1992 to 2000, "service offshoring" accounted for around 11 percent of the productivity growth in U.S. manufacturing industries compared to the 3 to 6 percent gain attributable to imported material inputs." Their analysis is the first comprehensive study to find a link between service offshoring and productivity. "Sourcing service outputs from abroad by U.S. firms is growing rapidly," they observe. "Although the level of service offshoring is still low compared to material offshoring, this business practice is expected to grow as new technologies make it possible to access cheaper foreign labor and different skills."

As for the significant effect on productivity, the authors observe, outsourcing in general -- whether it involves material goods or services -- can usher in new levels of efficiency. But, they view purchasing services from abroad as offering the greatest potential for gain. "When firms decide to outsource materials or services to overseas locations they relocate the less efficient parts of their production stage, so average productivity increases," they write. "The remaining workers may become more efficient if offshoring makes it possible for firms to restructure in a way that pushes out the technology frontier. This is more likely to arise from offshoring service inputs, such as computing and information, rather than offshoring material inputs."

Amiti and Shang-Jin note that additional research is needed to understand more precisely how buying services from foreign providers boosts domestic productivity. They also are interested in how the rise in service offshoring might affect U.S. incomes. Economists have long linked the rise of material outsourcing to the fact that for the last twenty years, wages for skilled workers have been increasing faster than wages for unskilled workers, a gap often referred to as the "skill premium." The authors observe that "service offshoring is likely to be more skill intensive than material offshoring" so, "it will be interesting to see what effects, if any, service offshoring has on the wage skill premium.

-- Matthew Davis