The effect of outsourcing on labor market outcomes in the US has become an important national concern. Evidence based on the operations of U.S. multinationals in the manufacturing sector suggests that increased capital mobility may be associated with negative labor market outcomes. Over the period 1977 to 1999 multinational manufacturing firms have shed close to 2 million jobs in the United States. Preliminary results show that labor's share of income has fallen dramatically and real wages have remained flat. Coincidentally, the loss of jobs in the U.S. has been almost entirely offset by an increase in jobs overseas. Even overseas, as the number of jobs has increased, real wages and labor's share of income have declined (by 14 percent in developed country affiliates and by 21 percent in developing country affiliates). These labor market outcomes have been accompanied by a substantial shift in the operations of US multinationals abroad. Between 1977 and 1999, the share of employment accounted for by overseas affiliates increased from 15 to 26 percent. Thus, even with an increase in capital-intensive technologies, it is not unreasonable to think that some of the downward pressure on labor market outcomes might be associated with the increased mobility of capital.
This research measures the impact of increased mobility of US investment capital on labor market outcomes in the US and abroad. Instead of focusing on inequality, the research examines how wages, labor's share in value-added, and employment are affected by increases in outsourcing activity. Although there is a lot of anecdotal evidence suggesting that US firms are using the threat of relocation to keep wages down in the US, there has been very little academic research focusing on this issue. Our theoretical framework leads to a set of estimating equations where we look at the determinants of labor compensation as a function of several variables. These variables include determinants of the relative bargaining strengths of labor and capital such as labor's alternative return, capital's alternative return, the fixed costs to plants of relocating abroad, and the number of other plants relocating in the same sector (the "threat" effect). The research will use confidential, previously unexploited, micro data collected by the Bureau of Economic Analysis (BEA) in Washington, D.C. to test this model.
