Extended Abstract: Inequality and trade in services in the UK

Transcription

1 Extended Abstract: Inequality and trade in services in the UK Martina Magli July, 2017 The present study investigates the role of rise in services offshoring on UK local wages inequality for the period From a theoretical point of view, offshoring is predicted to increase inequality between workers, with different intensities depending on the number of firms involved in international trade. Employing a new methodology, I firstly show how the effects of services offshoring are different alongside the employment and wage distribution. Next, I estimate the effects of services offshoring on wages inequality measures, taking into account potential endogeneity of services offshoring and implementing an instrumental variable approach. I employ a wide set of secure data from the United Kingdom, showing higher positive elasticity to services offshoring of firms at the top of the employment and wage distribution. At the same time and dissimilar to theoretical prediction, services offshoring is not statistically significant in increasing wages inequality. PLEASE DO NOT CIRCULATE. This work contains statistical data from the Office for National Statistics supplied by the UK Dataservice. The use of these data does not imply the endorsement of the ONS or the UK Data Service at the UK Data Archive in relation to the interpretation or analysis of the data. This work uses research datasets which may not exactly reproduce National Statistics aggregates. martina.magli@nottingham.ac.uk 1

2 1 Introduction and Objectives Recent literature has focus on the effects of increased import competition on major economies labour markets, highlighting the losses in terms of local employment and wages in the last three decades. Extensively discussed is the case of increased competition in goods imports from China that has led to losses both in terms of employment and overall income in local areas most exposed to trade ( Autor et al. (2013) Autor et al. (2014) for the U.S.). 1 When analysing the effects on the distribution, Malgouyres (2016) shows increase in polarization of employment in French local areas more exposed to manufacturing trade with China, while Helpman et al. (2016) shows increase in wages inequality due to increase trade in manufacturing within occupations in Brazil. In a recent paper Feenstra (2017) argues that rise in offshoring of highly skilled intermediates lead to increase in wage inequality in the domestic country, linking he increase in wages inequality with trade in services. In a previous study I show positive elasticity of local employment and wages to services offshoring exposure in the UK, highlighting heterogeneities of the effects when taking into account workers characteristics Magli (2017). The aim of this paper is to investigate the effects of services offshoring on local employment and wages distribution and to estimate the role of rise in services offshoring (here considered as services imports from abroad) on UK local wage inequality. Studies on wage inequality in the UK identify the increase in automation of workers routine tasks as main sources of inequality, discarding trade. From a theoretical point of view, and accounting for firms heterogeneities, offshoring is predicted to increase inequality between workers, with intensities depending on the number of firms involved in international trade (Egger et al., 2015) : more firms engaging in international trade reduce the negative effects generated by offshoring. The empirical analysis is conducted on a wide set of data from the United Kingdom for the period , enabling to fully monitor and geographically locate firms activities and trade information across the country, and able to observe workers employment status and characteristics. Preliminary results shows that within a sector local area, firms at the 1 Increase in Chinese import competition leads to increase wages and workers skill polarization in Denmark (Keller and Utar, 2016) (Utar, 2015), to decrease French manufacturing employment growth and growth rate (Malgouyres, 2016), to decrease manufacturing employment for workers with no degree in Norway (Balsvik et al., 2015). However, in Germany and Spain the negative effects of increase competition with China are offset by increase in exports opportunity (Dauth et al. (2016) for Germany)and increase in the construction sector employment (Donoso et al. (2015) for Spain). 2

3 top of the employment and wages distribution have higher positive elasticity to services than those at the bottom of the distribution. When estimating the elasticity of wage inequality to services offshoring, results are positive although not statistically significant. 2 Data Source Firms information on employment, employment expenditure, location and characteristics are obtained through the Annual Respondent Database (ARD) Secure Access. The dataset is a census of large firms (above 250 employees) and a representative sample of medium and small firms in Great Britain included in the Inter-Departmental Business Register (IDBR), a complete register of firms with VAT or PAYE schemes covering approximately 2.1 million enterprises. ARD secure access contains information on plants address and identification number, allowing to locate each firm production plant and to merge information between datasets. Beginning with 2007, ARD has been partitioned between the Annual Business Survey (ABS), containing information on firms activities, and the Business Register and Employment Survey, containing aggregate information over firms employment. For the purpose of the study, I have merged ARD and ABS creating a large dataset of firms and firms plant activities for the period Data on firms trade in services are obtained through the Inquire in International Trade in Services (ITIS) which provides detailed information on the type, value and partner country of traded services for a representative sample of firms from the ARD and it is available only through Secure Access. It is possible to merge ARD/ABS and ITIS datasets through firms identification number and the final result is an unbalanced panel of firms and firms activities for the years , later restricted to the period In order to account for different characteristics of the labour force, I use the Quarterly Labour Force Survey (QLFS) dataset, which collects information on employment status, economic activities, individuals and household characteristics and geographical location (obtained through secure access). All the cited datasets are provided by the UK Dataservice and collected by the UK Office of National Statistics (ONS). 3 Methodology and Results The first aim of the present work is to investigate the different effects of services offshoring on local employment and wages distribution and then to estimate whether services off- 3

4 shoring affects local wage inequality within the UK. Looking at the effects of services offshoring on the distribution of local employment and wages allows to identify whether some of the quantiles are driving the results of positive average elasticity of local employment and wages to services offshoring. However, conditional quantile analysis does not allow to account for error correlation and would allow to highlight dispersion within a covariate but not between covariates. I carry out the analysis implementing a new model proposed by?, belonging to the wide literature of quantile analysis applied to panel data, and allowing to account for heteroschedasticity of the error and endogeneity of the variables. The estimation begins aggregating the data at the sector local area level (which I will refer from now onwards as a group). Using single individual observation, I compute for each group the employment and wage distribution and then, for each quantile, estimate the following regression: lnq u y t ji = β u lnof F jit + ϕ it + ϕ jt + ε u jit (1) where u indicates the quantile, y the outcome variables in local area i sector j at time t, OF F the sector local area exposure to offshoring at time t and ε u jit the error clustered at the sector-local area level. Equation (1) includes local area-time fixed effects (ϕ it ), to account for changes in the outcome variable specific for a local area in a certain period, and sector time fixed effects (ϕ jt ), controlling for changes at the sector level. The coefficient of interest β u indicates the elasticity of the outcome variable to services offshoring exposure at quantile u computed for each sector local area level. The outcome variables (y in equation 3) are employment and wages, computed as firm s average cost per worker. Time-varying unobservable might be affecting at the same time services offshoring, employment and/or wages either across the whole distribution or for some selected quantiles. To address the potential endogeneity, I use imports of services from other high income countries as an instrument. The underlying assumption of the instrument is that increase in imports of services in other high income countries is not driven by trade but by countries internal shocks. The present identification strategy allows further to compute the effects of services offshoring on local wages distribution conditional to workers characteristics. I therefore compute the local wage elasticity of wage distribution to services offshoring employing as source of information the QLFS and following the specification: lnq u y t ji,gender,education = β u lnof F jit + ϕ it + ϕ jt + ε u jit (2) The main difference between equation 3 and 2 is the definition of a group: in equation 4

5 2 data are aggregated by workers characteristics (gender, education) in each sector local area and wage distribution computed at this group level. In a further step, I look at the effects of services offshoring on sector-local wages inequality, measured as the logarithm of the ratio between the top 90th and bottom 10th percentile of the wage distribution as extensively used in the literature (Juhn et al. (1993) and Gosling et al. (2000), amongst others). Similarly to the previous identification equation, is as following: lninequality jit = β 0 + β 1 lnof F jit + ϕ it + ϕ jt + ε u jit (3) 4 Results The empirical analysis begins estimating equation 3, where the coefficient of interest β u is estimated every 5 percentile and indicates the elasticity of local employment (or local wages) to services offshoring. Regression results for employment elasticities to services offshoring have an increase monotonic trend at the increase in the quantiles of analysis. To a 10% increase in services offshoring corresponds an increase of 0.49% in employment for those firms in the top 90th percentile of the employment distribution while for firms at the bottom 10th percentile of the employment distribution the increase in employment is of 0.26%. Similarly for wages, firms at the top 90th percentile of wages distribution have higher elasticity of wages to services offshoring than those at the bottom 10th of the distribution: to a 10% increase in services offshoring leads to 0.1% increase in wages in the first case and to 0.09% increase in the latter. However, local wage elasticities are higher for those firms at the bottom and top 25th percentile of the wages distribution: a 10% increase in services offshoring leads, respectively, to 0.109% and 0,103% increase in local wages. Results are similar in significance for both local employment and wages elasticities when implementing the instrument. As further step, I estimate wage elasticity to services offshoring for each quantile of the employment distribution. A 10% increase in services offshoring exposure leads to 0.2% in wages for firms in the bottom 10th percentile of employment distribution and to 0.11% increase for firms at the top 90th percentile of the same distribution. However, a 10% increase in the services offshoring has almost null effects on wages for firms between the 15th and 30th percentile of the employment distribution. Controlling for workers characteristics, for those without a degree elasticity of wages to services offshoring is inversely proportional with the quantiles: those at the 5

6 top of the distribution have the lowest negative elasticity amongst the whole distribution. Similarly, for workers with a degree workers at the bottom of the distribution have the highest positive elasticity and those above the median have around 0 elasticity to services offshoring. Decomposing further and conditioning the wage distribution to level of education and sex, it is observed that women with no degree have negative elasticity to services offshoring at any point of the distribution while for female with a degree is observed a concave curve with maximum peak is at the median. For each sector-local area I then estimate the effects of imports of services on inequality, measured as the difference of the logarithm of the 90th and 10th percentile of the average wage distribution, using data form the ARD and the ITIS, therefore using information reported by the firms. Overall results indicates a positive elasticity of local inequality measure to services offshoring as predicted by the theory, although statistically insignificance. To a 10% increase in services offshoring corresponds 4.1% increase in local wages inequality. Inequality measure is then decomposed in top inequality as the difference between the 90th percentile and the median- and bottom inequality as the difference between the median and the bottom 10th percentile. Both elasticities of inequality to services offshoring are positive, with higher magnitude and statistical significance for top inequality (a 10% increase in services offshoring leads to 2.6% increase in top inequality and to 1.3% increase in bottom inequality). 5 Conclusions The present study aims to estimates to services offshoring on local employment and local wages distribution in the UK and to estimate the effects of rise in services offshoring on local wages inequality. Within a local area, those firms at the top of the employment and wage distribution have higher employment and wage elasticity to services offshoring than those firms at the bottom of the distribution. Although not statistically significance, higher services offshoring leads to increase in local wage inequality. References Autor, D. H., Dorn, D., and Hanson, G. H. (2013). The China syndrome: local labour market effects of import competition in the United States. American Economic Review, 103:

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