2 The Effects Of Outsourcing On Unemployment and Changes In Relative Wages

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1 2 The Effects Of Outsourcng On Unemployment and Changes In Relatve Wages 2.1 Debatng Issues A natural consequence of globalzaton s to make domestc ndustres movng offshore, that s, the new global job shft. Dependng on the lower wage rate, plenty of natural resources, and a vast market for domestc sellng, Manland Chna has become the key product-development center of the world. Facng wth such a strong suckng sound, Tawan busnesses nvest n Manland Chna consequently leads to a seres of unemployment and relatve wages questons. Actually, the polcy of no hast, be patent manly lmted Tawan busnesses to nvest n Manland Chna, whch had been frst declared by Presdent Lee n 1996 and formally became a legslatve regulaton regulated by M.O.E.A n In order to comment on ths polcy, we have to understand what s the background behnd t. In the 1980s, due to NT dollars apprecated relatvely to U dollars, domestc wage-cost and land-cost had ncreased n a large extent and therefore ncreased operaton-cost of tradtonal ndustres that are labor-ntensve before. As the economc dependence on Manland Chna got larger and larger, Present Lee therefore clamed to practce no hast, be patent polcy n order to prevent from the rsk of trade. Generally speakng, busness movng offshore may cause unemployment n quantty, wdenng n wage nequalty, and rsk of technologcal exportng. Let s see these problems of Tawan brefly: Unemployment Accordng to the Investment Commsson, MOEA, Tawan approved nvestment to Manland Chna accumulated 29,113 cases from 1991 to the end 8

2 of December 2003, whch totaled U$31.20 bllon. Up to 44.65% of Tawan total foregn nvestment was attracted by Manland Chna such that t becomes the foremost destnaton of foregn nvestment for Tawan. At the same tme, the unemployment rate n 2003 was up to 4.99% and nearly thousands labor force were unemployed. Trends of unemployment rate are lsted as Table 2.1. Among ths table we can fnd a dramatc growth n unemployment rate, whch was due to lay-off and busnesses moves out snce Table 2.1 Trends of Unemployment Rate Year A (%) B (%) C(%) Year A (%) B (%) C (%) * * * * Notes: 1. Column A s the unemployment rate of the whole country. 2. Column B s the unemployment rate due to lay-off and busness movng out. 3. Column C s the share of nvestment n Manland approved by M.O.E.A to total foregn nvestment. (* means regstraton of prevous unregstered nvestment s not ncluded) Data ources: 1.Drectorate General of Budget Accountng and tatstc Executve Yuan. 2.uang (2003) Wage Inequalty In the long run, the trend that Cross-trat economes are gong to get closer s nevtable. Accordng to factor-prce equalzaton theory, lberalzaton between Cross-trat trade wll lead to decreasng n wages of unsklled workers, whch s because that mportng a large quantty of labor-ntensve goods from Manland Chna wll decrease the demand for unsklled workers n Tawan. On the other hand, wages of sklled workers wll ncrease due to shftng demand toward sklled workers and therefore wden the wage nequalty. 9

3 Technologcal Exportng After reachng the regulated producton scale of 12 wafer, the Tawan emconductor Manufacturng Company (T..M.C) was approved to export the whole equpment of 8 wafer to Manland Chna. No example of semconductor frms before T..M.C was allowed to the exodus of the whole factory. What M.O.E.A.I.C consdered s not only the possble problem of unemployment, but also ncludng of the crss of technologcal exportng. Technologcal exportng s one of the spllover effects of FDI/ outsourcng/ multnatonal frms n the host country. Caves (1974) dstngushed such spllover effects nto three knds: allocatve effcency, techncal effcency, and technologcal transfer. Technologcal transfer (exportng), whch can make frms n host country obtan the new technology to ncrease ther productvty, proft and compettveness, usually comes wth transferrng equpment, facltes and techncans, etc. Once Manland Chna obtans the equvalent level of technology or even advanced one, t stands to reason that the technologcal dependence of Manland Chna on Tawan wll consequently reduce and lead Tawan to lose ts compettveness gradually. ufferng ths compettve crss, Tawan compettveness can mantan only through ndustral transton and upgradng. As a result, notce how to stay new, hgh-technologcal ndustres n Tawan should be an mportant ssue n economc polces. 10

4 2.2 Lteratures urvey Are These Due to Outsourcng? There are mountng related lteratures that attrbuted the wage dfferentals to technologcal changes, educatonal dstrbuton, and nternatonal trade. Actually, t s belevable that all the factors above are one canddate of the causes, n other words, we cannot exclude anyone from the canddates for possble explanatons Technologcal Progress/Changes everal studes about ncreases n relatve demand for sklled workers and wdenng wages-gap between sklled and unsklled workers ever concluded that: hgh productvty and technologcal progress should be the most possble explanatons for shftng demand, whle nternatonal trade and outsourcng does not bear the sgnfcant responsblty. uch studes are Krueger (1993), Krugman and Lawrence (1994), Berman, Bound and Grlches (1994) and Johnson (1997). Krueger (1993) consdered that ntroducng computer revoluton nto producton actvtes was the man cause of sklled-based technologcal changes. Workers who use the computer on ther jobs have the hgher earnng than those who do not, other thngs beng equal. Krugman and Lawrence (1994) adopted a descrptve llumnaton that the wdenng wage gap could be mostly attrbuted to changes n pattern of domestc consumpton and rapd growth of sklled labors productvty. o they have proposed the vew of blamng foregn competton for U.. economc lls s neffectve, the real problems le at home. They recognzed that even f the world markets had not become so ntegrated, dfferences of relatve demand and wages would also exst. Berman, Bound and Grlches (1994) used both tme seres regressve model and cross-sectonal regressve model to prove that technologcal change and domestc consumpton has been the man, most mportant contrbutors to changes n relatve demand for sklled workers. 11

5 Internatonal trade and mports are not the sgnfcant factors. In Johnson (1997), the author tred to fnd out the possble explanatons responsble for ncreasng wage nequalty. What mght shft demand towards more sklled workers he thought were ncrease n relatve supply of hgh-sklled workers, ncreased openness, and technologcal changes. Johnson (1997) ponted out that because change n relatve demand for sklled workers was more than that n relatve supply of sklled workers, extensve-technologcal changes played the key role of the wage dfferentals the author consdered. Increased openness was too small to produce relatve demand to shft. Took Dansh T&C ndustry for nstance, Bjerrng Olsen, Ibsen and Westergaard-Nelsen (2004) found that although GDP n Denmark decreased, however, GDP per labor n Dansh T&C ndustry ncreased. o they concluded that ndustral outsourcng does not drectly nduce unemployment of unsklled workers, but t s only the result of natural phase-out n each ndustry Internatonal Trade/Outsourcng Feenstra and anson (1995) desgned a theoretcal model to fnd out that 15-33% of the ncrease n the relatve wages of sklled workers s nfluenced by rsng mports. Further more, they also dscovered that wdenng wage nequalty would happen both n outsourcng and outsourced countres. The same fndng was found n Markusen and Venables (1995) and Feenstra (1998). Next, Feenstra and anson (1996) further enlarged the defnton of outsourcng and found that 30.9%-51.3% of the ncrease n sklled workers wage share can be explaned by outsourcng. Feenstra and anson (1999) added technologcal change nto ther analyss and found that both factors can explan rse n relatve wages of sklled workers sgnfcantly, each s 35% by technologcal change and 15% by outsourcng. Wood (1995) consdered that trade and outsourcng wll affect the relatve demand and wages through two ways: the frst s mport prce and second s mportng labor-ntensve goods that would dsplace more unsklled workers. Besdes that, conventonal 12

6 estmates of the trade/outsourcng effect on relatve demand almost gnorng the contrbuton of trade to technologcal progress, therefore the nfluence of trade/outsourcng on wage dfferental were almost understated. A modfed calculaton method of factor content n Wood (1995) roughly found out the effect of trade/outsourcng on wage nequalty s twce more than prevous studes dd. hachs and hatz (1996) s a paper about dscussng trade-wage lnkages. They frst used a smple theory to llumnate that even f relatve prce of unsklled labor -ntensve goods does not change (exactly what -O theory says), wage dfferental wll also occur due to outsourcng, monopolstc strategy, and R&D nnovaton. They also found the tmng consstent n declnng labor demand n less-skll sectors and declnng mport-competng sectors. In laughter (1998), he found that rse n wage dfferental has occurred both between workers of dfferent skll levels and wthn a gven skll level. Both nternatonal trade and technologcal based toward sklled workers were two possble explanatons n hs research. laughter (1998) also thought that the -O theory and tolper-amuelson theorem were not perfect frameworks to explan the stuaton of wdenng wage nequalty. That s, there are lmtatons nsde and outsde the -O model, whch s over-smplfed. Make a comprehensve survey of these lteratures, some are mostly emphaszed the effect of technology on shftng demand and wage nequalty, whle others stress the mportance of nternatonal trade and outsourcng on those. Bascally, we have to understand that technology and trade effects that both matter the results. (Feenstra and anson, 1996; achs and hatz, 1996). Outsourcng, whch s nclusve of mportng ntermedate nputs and all producton procedures that done by others, s seen as a non-neutral technologcal progress toward sklled workers (Feenstra and anson, 1995, 1996), therefore we can combne these two possble canddates of technology and trade/outsourcng and employ a model desgned by Feenstra and anson (1996) to make some explanatons and fndngs. 13

7 2.2.3 Basc tory of Feenstra and anson (1995) In a North-outh trade envronment, the North has abundant sklled worker and captal. There s only a fnal good Y that s produced from a seres of contnuum ntermedate nput n Cobb-Douglas producton functon. The ntermedate nput z s manufactured by captal, sklled workers and unsklled workers (whch s Leontef relaton n two types of workers) n Cobb-Douglas technology. Now assume captal moves from the North to the outh for hgher captal return rate. No matter what knds of captal flow takes, there are several fndngs dscovered. Frst, because of dfferences n countres endowment, captal flow propels the North to be the outsourcng country and the outh to be the outsourced country. Outsourcng results n changes n relatve employment and wage share. When outsourcng happens, relatve labor demand for sklled workers n both North and outh ncrease, whle that for unsklled workers decrease. uch trends also reflect on the changes n ther wage shares. econd, outsourcng wll ncrease the technologcal level n both countres. Therefore outsourcng holds the same effects on unemployment and changes n relatve wages as technologcal and ndustral upgradng do. Regressng the ncreasng trends n sklled workers relatve employment and relatve wage share, Feenstra and anson (1995) found that these phenomenons were consstent wth rsng mport n Unted tates and Mexco. Wth growng outsourcng from Tawan to Manland Chna, the effects of outsourcng on labor market should be emphaszed. A trend of ncrease n relatve demand for sklled workers also took place n Tawan manufacturng sector and so dd the relatve wage gap. Usng these results to make polcy suggestons s the man purpose of ths chapter. 14

8 2.2.4 Model Assumptons and Dervaton of Feenstra and anson (1995) Assume n a world wth two countres, North and outh. Provded that North s relatvely hgh sklled-abundant and captal-abundant to outh,.e., outh s relatvely low sklled-abundant, and thus reflect on ther prces below. 5 A. r N < r, B. q N wn < q w, C. L '( q w ) 0 '( q w ) 0 w s the wage of unsklled worker, q s for wage of sklled worker, r s for the return rate of captal, L( q w ) represents supply of unsklled workers, and ( q w ) s supply of sklled workers, for = N,.The frst unequal functon says that captal stock n the North s more than that n the outh; the second ponts out the fact that sklled workers relatve to unsklled workers n the North s more than that n outh; the thrd functons only tell us that the demand for sklled and unsklled workers n both countres are consstent wth the law of supply. The producton functon of ntermedate nput s shown as equaton (2-1). x [ { }] θ 1 mn l( z), h( z) [ K( )] θ ( z) = A z (2-1) Y s the fnal manufactured good produced from a contnuum of ntermedate nputs (z), where we normalze z [0,1] ), whch are sequentally produced by sklled workers ( ), unsklled workers ( L ) and captal ( K ). Fnal goods can be assembled n any country costlessly. Producng a unt of z needs a L (z) of unsklled worker and a (z) of sklled worker, and L (z), (z) denote the total usage. Accords wth realty, a ( z) al ( z) s ncreasng n z, and each nput requres captal K(z) that substtutes for labors n a Cobb-Douglas producton functon. uppose captal has the same degree 5 Professor on ponted out that because the asymmetrc sze between Tawan and Manland Chna, t s more approprate for r to take per capta form. owever, n order no to transform ths model, here I am forced to descrbe r n a total form for presentng the orgnalty of ths model. 15

9 substtuton wth sklled or unsklled workers n producng ntermedate nput. l (z) equals to L( z) al ( z), whch s explaned as needed amounts n producng certan degree of ntermedate nputs z. The same explanaton s for h(z) whch equals to ( z) a ( z). θ s the percentage of labor usng n producton process. A s the exogenous technologcal dfference between the North and the outh. The producton functon of fnal goods Y s equaton (2-2): lny = 1 α ( z)ln xdz, wth α( z) dz = 0 α(z) s the percentage that degree of ntermedate nput used for producng Y, ntegratng such as we show. ( z) x α 1 0 wth z from 0 to 1 and calculatng t n a logarthmc form 1 (2-2) Maxmzng equaton (2-1) subject to the producer s cost constrant, the mnmum cost of producng an nput z n country s stated as equaton (2-3). Gven wage fxed, the mnmum cost of an nput s a functon of z whch s llustrated n Fgure 2.1 as C N C N and C C. θ 1 θ [ w a ( z) + q a ( z) ] c( w, q, r ; z) = B r L, where B 1 = θ θ (1 θ ) A (2-3) C C C N C N C N C N C C 0 z* z' 1 Fgure 2.1 Equalzaton of Producton Cost The mnmum cost of producng an nput z wll equalze n both countres and equaton (2-4) s the equlbrum condton computed. c( w, q, r; z*) = cn( w, q, r; z*) (2-4) 16

10 Equaton (2-4) ponts out that actvtes whch z > z * wll take place n the North country and actvtes z < z * wll take place n the outh country. gher-technologcal works carry out n North can ensure ts compettveness wth the outh. Next queston s how to determne z*? We have to solve seven unknown varables L *, *, K *, z*, LN *, N *, K N * by eght equatons. Take outh case for example, dfferentate equaton (2-3) wth relatve wage ( q w ) and then ntegrate wth z wthn the range from 0 to z* (for outhern workers) or from z* to 1 (for Northern workers), we can get equaton (2-5) and equaton (2-6). Then by operatng Walras s Law we obtan equaton (2-7). For convenence, another smplfcaton s world expendture that denoted as E, s normalzed to 1. Equaton (2-8) s obtaned n use of the feature of Cobb-Douglas functon. L ( q ( q w ) = w ) = z* 0 z* 0 Bθ wsa L Bθ wsa r s ( z) + q a L r s ( z) + q a ( z) ( z) 1 θ 1 θ a ( z) x dz L a ( z) x dz (2-5) (2-6) r K s s 1 θ ( θ [ w L + q ] ) = s s s s (2-7) x ( z) = α( z) E, z [ 0, z*) C (2-8) Repeatng the same steps above agan, we can also derve three analogous full-employment condtons n the North, and accompanyng wth the defnton of E, we can solve not only z* but also L *, *, K *, LN *, N *, K N *. Next step, we prepare to check out the effect of outsourcng. When a busness decde to outsource some part of ts producton procedures, t faces several knds of methods what we call outsourcng. It can choose to mport some ntermedate nputs that have ever been produced domestcally, or t can buy some fnal good produced by foregn frms but sold under ts brand name. Other frequently used ways of outsourcng are to 17

11 establsh a blateral relatonshp-specfc nvestment contract (Grossman and elpman, 2002), or engage n multnatonal frms (Markusen and Venables, 1995). Now suppose a Northern enterprse chooses to establsh multnatonal frms n the outh and therefore make captal flow from North to outh, suchlke the captal flow from Tawan to Manland Chna. What wll happen? Through equaton (2-3), we fnd that t wll lead to an ncrease n the mnmum cost of producng per nput n North, and a declne n the mnmum cost of producng per nput n outh (ee Fgure 2.1, C N C N rses to C N C N, and C C shfts down to C C ) whch n turn reflected on z that makes z* shft to z. What senses do the outsourcng mean by changng z* to z? Consder the followng consequences. Frst, we replace equaton (2-7) nto equaton (2-5) and equaton (2-6) for smplfcaton and get equaton (2-9). D ( q w ) z* 0 = z * 0 a ( z) α( z) E dz w a z q a z L ( ) + ( ) al ( z) α( z) E dz wal z qa z ( ) + ( ) (2-9) Equaton (2-9) s defned as the relatve demand for sklled workers ( D ). Dfferentatng D n logarthmc form wth equlbrum z*, we obtan the comparatve statc analyss of D when equlbrum z* changes. For the same reason, we can get along wth comparatve statc analyss of D N when equlbrum z* changes too. Both are llustrated wth equaton (2-10) and equaton (2-11). ln D z * L ( z*) a = a L ( z*) ( z*) L > 0 (2-10) ln D z * N = LN ( z*) N L N N a a L ( z*) > 0 ( z*) (2-11) 18

12 L (z*) denotes the unsklled workers used n z* f t s produced only n country. Equaton (2-10) and (2-11) mean that: an ncrease n equlbrum z* wll result n a demand of more sklled worker ntensve n both countres. Therefore, there are two probable stuatons: f we keep full employment assumpton, there maybe more workers concentrate on lower-level jobs and hgher-level jobs than before wthn the ndustry, led to a change n the ndustral structure; f we cast off the full employment assumpton, a more sklled worker ntensve wll probably nduce to the unemployment of unsklled workers n both countres, whle t really follows wth ndustral upgradng wthn each country. Next, when outsourcng occurs, t wll enhance technologcal levels n both North and outh, whch we call that technology exportng effect or knowledge spllover effect. It s also vtal that outsourcng wll also affect relatve wage dstrbuton between sklled and unsklled workers through changes n relatve demand. In order to understand how the changes n the relatve wages after outsourcng, a smple fgure narratng could be used to gve llustraton. Proved by equaton (2-10) and equaton (2-11), we all know that outsourcng wll lead to an ncrease n equlbrum z*, and hence rase the relatve demand for sklled workers. It s easly shown by Fgure 2.2 that the relatve demand curve for sklled workers n both countres wll shft rght and makes equlbrum pont from A to C whch results n relatve wages of sklled workers ncrease. q w D upply C A B (z*) D (z') D L Fgure 2.2 Change n Relatve Demand for klled workers 19

13 2.3 Implcatons, Cases of Tawan and Fndngs Implcatons We can obtan some mplcatons for commentng on no hast, be patent polcy through Feenstra and anson (1995). Frst, outsourcng, no matter what types taken, wll ncur analogous effects on relatve demand and wages that technologcal progress may cause. ee Fgure 2.1 and Fgure 2.2, f outsourcng actvtes happen from Tawan to Manland Chna, both countres wll tend to more sklled labor ntensve than before. Therefore, unemployment of unsklled workers may arse n both countres, nstead of labor demand shftng toward unsklled workers n Manland Chna. The changes n relatve demand s accompaned by technologcal upgradng, whch means that such unemployment s probably caused by unsklled workers who fal to move to sklled sectors n a short run. Due to nsuffcent of knowledge, sklls ds-matchng, and exstence of nformaton costs, unemployment of unsklled workers was recognzed as the structural unemployment by laughter (1998), uang (2003) and Bjerrng Olsen, Ibsen and Westergaard-Nelsen (2004). That s, such structural unemployment s the expected outcome when tryng to make technologcal/ ndustral upgradng, and t s also one of the contemporaneous effects when outsourcng occurs. Nowadays, because many Tawan busnesses enhance ther technologcal level from OEM to ODM and re-outsource low sklled producton procedures to Manland Chna, technologcal upgradng takes place as well. Therefore, f government wanted to protect domestc unsklled workers, no hast, be patent polcy made only lttle effects. econd, wdenng n wage nequalty just reflects the shft of demand. For the same reasons, outsourcng s not the only contrbutor to the ncrease n wage gap, but also for technology, educaton, and nsttutons (laughter, 1998). Announcement of no hast, be patent polcy cannot completely prevent the problem. 20

14 Thrd, a spllover effect mplct n Fgure 2.1 can be read out as below. Outsourcng ncreases n Tawan wll shft some lower-sklled jobs to Manland Chna, for examples, assemblng, processng, and machne operatng. Tawan busnesses nvest/outsource to Manland Chna brngs many effects on ncreasng employment, workers qualty, and changes n worker structure of ther economy. In addton, technologcal exportng s also a great, nvsble beneft to the host country (Caves, 1974). In the flow of foregn nvestment and outsourcng, Tawan transfers ts know-how and technology to Manland Chna, who mght replace the role of Tawan n nternatonal market n the fnal. Thus we can see clearly from ths model that strategy of outsourcng should be carefully undertaken. mply speakng, we have no reasons to lmt the unproftable and dsadvantaged ndustres to move out. What we should do s to develop and expand the hgher-sklled sector and to encourage hgh-technology ndustres to upgrade the producton wth the most comparatve advantage Cases of Tawan and Fndngs Many earler lteratures manpulated dfferent methodologes to check out the causalty between nternatonal trade and shftng demand, between outsourcng and shftng demand, and between technology progress and shftng demands. ome of them found out emprcal evdences by tme seres and cross-sectonal regressons (Berman, Bound, and Grlches, 1994; Feenstra and anson, 1995, 1996; uang, 2003; achs and hatz, 1996), some tred to prove the effects n a theoretcal method (Krugman and Lawrence, 1994; Wood, 1995; laughter, 1998), and the others showed many fgures of current trends of actual facts (Berman, Bound, and Grlches, 1994; Feenstra and anson, 1995). tudes about the effects of FDI researched n Tawan mostly focus on the relatonshp between Tawan and other developed countres. owever, few 21

15 researches pay attenton to the effects of outsourcng on relatve employment or wdenng wage nequalty between sklled and unsklled workers at present. In ths secton, I expect to present how the relaton between outsourcng and wdenng wage nequalty s n Tawan by showng several related fgures. Defntons of klled and Unsklled Workers Before llustrate these fgures of trends, I have to make exposton of what I defne as sklled and unsklled workers n ths thess. Bascally, sklled workers mean non-producton workers, who are personnel, nstallaton and servce, sales, delvery, professonal, technologcal, admnstratve workers, etc. Unsklled workers are producton workers, who engage n fabrcatng, processng, assemblng, nspectng and other manufacturng (Berman, Bound, and Grlches, 1994). Other classfcaton could be obtaned n Wang (1999) that dstngushed workers nto salared workers (seen as sklled workers) and wage earners (seen as unsklled workers). Among these, managers, supervsors, clerks, professonals, and techncans & assocated professonals are those classfed as salared workers/sklled workers; servce workers, sales, and producton workers, machne operators, and related workers employed n fabrcatng, processng, assemblng, nspectng are classfed as wage earners/unsklled workers. Categores classfed n Berman, Bound, and Grlches (1994) and Wang (1999) are somewhat dfferent n the tem of servce workers & sales. In the subsequent dscusson, I take salared workers as sklled workers and wage earners as unsklled workers for data consstency. Besdes that, Councl of Labor Affars (C.L.A) also tres to classfy each employment nto whte-collar workers or blue-collar workers. Whte-collar workers nclude legslators, government admnstrators, busness executves and managers; blue-collar workers nclude agrcultural, anmal husbandry, forestry and fshng workers. Accordng to ths offcal classfcaton, however, servce workers and sales cannot belong to nether whte-collar nor blue-collar 22

16 workers. In order to keep data nformaton completely n Table 2.9 and Table 2.10, I add servce workers and sales ether n whte-collar or blue-collar category whch s obeyed the defntons of Berman, Bound, and Grlches (1994) and Wang (1999), whereas the dstncton s mnor n numercal presentaton. Data ources and Coverage Years Our work n ths secton s based on data drawn from Yearbook of earnngs and Productvty tatstcs and Yearbook of Manpower urvey tatstcs of a perod from 1989 to 2002, Census Bureau, D.G.B.A.. Data n Yearbook of Wage and Productvty tatstcs gves us the employee-amounts and the employee-wages of salared workers and wage earners n manufacturng, whch I present n Table 2.3 to Table 2.7 subsequently. Yearbook of Manpower urvey tatstcs offers us to observe the percentage changes n eleven years from 1993 to 2003, whch I prepare to show n Table 2.8 and Table 2.9. Case and Fndngs Foregn studes n the topc of outsourcng effects on unemployment and changes n relatve wages almost notced that: When the percentage of outsourcng ncreases over tme, there are major facts usually dscovered. Each s declnng share of manufacturng employment n total employment, ncreasng share of sklled workers n total manufacturng employment and n total wage bll, whle the converse n unsklled workers. In the next steps, I wll revew these trends descrbed above to explore whether such phenomena have occurred n Tawan. The possble explanatons and economc mplcatons are also suggested. 23

17 Case and Fndngs (I) Is outsourcng ncreasng over tme? Outsourcng s broadly defned. There s stll no offcal data and defnton n Tawan so that we cannot obtan the accurate outsourcng data. I use the estmated data computed n a roundabout way by uang (2003) and further extend her data from 2000 to 2004 by the average growth rate from her study, see Table 2.2, Fgure 2.3 and Fgure 2.4. Table 2.2 Percentage of Outsourcng Inputs, Outsourcng nputs/total nputs Outsourcng nputs from Chna/total nputs Data ource: uang (2003). Data ource: Table 2.2 Fgure 2.3 Percentage of Outsourcng Input Data ource: Table 2.2 Fgure 2.4 Percentage of Outsourcng Input from Manland Chna 24

18 What we can realze from these two fgures s that the growth rate of outsourcng nputs from Manland Chna s faster than average level of whole outsourcng nputs. It mples the fact that snce nvestment n Manland Chna was approved began at 1990s, Manland Chna has already become the most mportant specfc-nvestment partner n recent years. In Fgure 2.4, we orgnally predct the growth rate should be more acceleratve after the year 1999 rather than average growth, but one fact no hast, be patent polcy started at 1997 mght lower ths acceleraton effect. That s to say, f the polcy of no hast, be patent never occurred, t s reasonable to guess the slope of the curve n Fgure 2.4 would be more steeper after 1999 than we have shown. Case and Fndngs (II) Is the share of manufacturng employment n total employment declnng? Outsourcng means parts of producton procedures movng out to other countres, whch wll lead to relatvely developed country shfts away from manufacturng, that s what we called dendustralzaton, economc perphery, or ndustral hollowng-out. Data of manufacturng employment share n total employment s lsted n Table 2.3 and the trend s pctured n Fgure 2.5. Table 2.3 Manufacturng Employment hare n Total Employment Year Manufacturng Employment hare n Total Employment (%) Year Manufacturng Employment hare n Total Employment (%) Data ource: Yearbook of Earnngs and Productvty tatstcs, Census Bureau, DGBA. 25

19 Data ource: Table 2.3 Fgure 2.5 Manufacturng Employment hare n Total Employment We can see clearly that the share declned sharply durng 1989 to 1996 and fluctuated slghtly between 0.27 and 0.29 after o we can say that no hast, be patent polcy mght have the temporary, short run effect, but t stll could not stop the declnng trend of manufacturng employment share. Case and Fndngs (III) Is the share of sklled workers ncreasng n total manufacturng employment, whle that of unsklled workers decreasng n total employment? Does the wage nequalty between sklled and unsklled workers get larger? how the evdence on whole manufacturng. Only sklled and unsklled employees n manufacturng can be obtaned from Yearbook of earnngs and Productvty tatstcs, rather than the amounts of sklled and unsklled employment. As the result of ths lmtaton, I compute the share of sklled and unsklled employees n manufacturng to total employees n manufacturng at Table 2.4 and fgured n Fgure 2.6. Wage shares of sklled and unsklled employees n manufacturng to total manufacturng employees wage bll s provded at Table 2.5 and Fgure

20 Table 2.4 hares of klled and Unsklled Employees n Manufacturng to Total Employees n Manufacturng Year Data ource: Yearbook of earnngs and Productvty tatstcs, Census Bureau, DGBA. Data ource: Table 2.4 Fgure 2.6 hares of klled and Unsklled Employees n Manufacturng to Total Employees n Manufacturng 27

21 Table 2.5 Wage hares of klled and Unsklled Employees n Manufacturng to Total Wage Bll n Manufacturng Year Wage hare of klled Workers Wage hare of Unsklled Workers Data ource: Yearbook of Earnngs and Productvty tatstcs, Census Bureau, DGBA. Data ource: Table 2.5 Fgure 2.7 Wage hares of klled and Unsklled Employees n Manufacturng to Total Wage Bll n Manufacturng 28

22 It s not surprsng that these trends of sklled employee employment share and wage share are rsng wth tme, whle those of unsklled workers are declnng. That s to say, the relatve demand for sklled workers ncreases n the manufacturng labor market. Both fndngs n Fgure 2.6 and Fgure 2.7 are consstent wth what predcted n Feenstra and anson (1995). Case and Fndngs (IV) Check the same questons as (III) but show the evdence on electrc & electronc related ndustres. We have seen the relatve employment and wage trends n the whole manufacturng. It s curous that do those fndngs also happen n certan specfc ndustry? We take electrc & electronc related ndustres for nstance. Table 2.6 and Table 2.7 correspond to employees employment share and wage share of sklled and unsklled n electrc & electronc related ndustres to total employees and total wage bll n electrc & electronc related ndustres. Table 2.6 hares of klled and Unsklled Employees n Electrc & Electronc related to Total Employees n Electrc & Electronc related Year Data ource: Yearbook of Earnngs and Productvty tatstcs, Census Bureau, DGBA. 29

23 Data ource: Table 2.6 Fgure 2.8 hares of klled and Unsklled Employees n Electrc & Electronc related to Total Employees n Electrc & Electronc related Table 2.7 Wage hares of klled and Unsklled Employees n Electrc & Electronc related to Total Wage Bll n Electrc & Electronc related Year Wage hare of klled Workers Wage hare of Unsklled Workers Data ource: Yearbook of Earnngs and Productvty tatstcs, Census Bureau, DGBA. 30

24 Data ource: Table 2.7 Fgure 2.9 Wage hares of klled and Unsklled Employees n Electrc & Electronc related to Total Wage Bll n Electrc & Electronc related These trends are fgured n Fgure 2.8 and 2.9. Compare Fgure 2.6 wth Fgure 2.8, Fgure 2.7 wth Fgure 2.9, an nterestng stuaton s observed. lopes of both type workers total employment share and wage share n electrc & electronc related ndustres are steeper than those of the whole manufacturng: each s 1.26 tmes and 1.06 tmes that of the whole manufacturng. What s the cause of the dfferences between Case (III) and Case (IV)? In the outsourcng relatonshp between Tawan and Manland Chna, Tawan shall be the role of Northern country n Feenstra and anson (1995) model. owever, t mght be a msunderstandng. An mportant fact we have to recognze s that Tawan s also the destnaton countres of outsourcng n global economy, especally n famous ndustres electrc & electronc related ndustres. That s to say, Tawan s also the outsourced country n the global economy, whch 31

25 was denoted as outhern country n Feenstra and anson (1995). Whch role of Tawan n electrc & electroncs related ndustres plays more? Fndng out the slopes of workers total employment share and wage share n electrc & electronc related ndustres are 1.26 tmes and 1.06 tmes of the whole manufacturng, we can conclude that Tawan plays more n outhern country n electrc & electronc related ndustres. It also could be clarfed through dfferentatng equaton (2-10) and equaton (2-11). We can dfferentate both equatons wth z* to observe whether Tawan s the Northern (outsourcng) country or the outhern (outsourced) country n electrc & electronc related ndustres. Assume = ( ln D z *) found n electrc & electronc related ndustres s ( z *) > 0 φ and case we φ, 6 that s, we can obey ths outcome to clarfy the role of Tawan n electrc & electronc related ndustres. ln D φ = z * L ( z*) a = a L ( z*) ( z*) L > 0 (2-10) > φ 1 L(*) z a(*) z L(*) z ( a(*) z al(*)) z = + = 0 z* z* al( z*) L z* < (2-12) φ N z * = 1 N ln DN φ N = z * LN ( z*) z * L N N LN ( z*) N a ( *) z = > 0 N LN al ( z*) a ( *) z LN ( z*) ( a ( z*) a a ( z*) L N z * L ( z*)) < 0 (2-11) (2-13) The sgn of Equaton (2-12) wll be ndefnte because of L (*) z z* < 0 and ( ) a (*) z a (*) z z* > 0. Equaton (2-13) wll be postve because of L (*) * 0 N z z L < and ( ) a (*) z a (*) z z* > 0. L Compared fndngs n equaton (2-12) and equaton (2-13) wth emprcal evdences, we can clarfy that because the outhern (outsourced) role weghs 6 It means that when the outsourcng level z* s hgher (such as that of electrc and electronc related ndustres s hgher than that of whole manufacturng), the effects of outsourcng on relatve demand and wage nequalty wll be stronger. 32

26 more than the Northern (outsourcng) role, hgh unemployment of unsklled workers n electrc & electronc related ndustres cannot be mostly due to outsourcng to Manland Chna, but attrbute t to outsourced from global economy. A general mplcaton we get here s when some ndustry plays outsourced role more, then when the outsourcng level z* s hgher, the effects of outsourcng on relatve demand and wage nequalty wll be stronger probably. Case and Fndngs (V) Besdes the structural changes between occupaton of sklled and unsklled workers durng resent years, s there any change wthn occupaton? It s also found by Berman, Bound and Grlches (1994) and laughter (1998) that, not only the relatve demand shfts toward sklled workers and thus nduced to wage nequalty between occupaton, but such changes wll also happen wthn-occupaton too. We can see how on earth s n manufacturng structure n Tawan. In Table 2.8 and Table 2.9 we can observe the trend of technologcal upgradng n the whole. Both Tables show whte-collar workers ncreased and blue-collar workers decreased over tme; among these, servce workers, shop and market sales workers, producton and machne operators and related workers has declned durng the decade snce

27 Table 2.8 Occupatonal Dstrbutons and Changes Wthn Manufacturng by Year (Accordng to Berman, Bound and Grlches, 1994) ( ) ( ) Total klled Employees Percent n Manufacturng Whte-Collar Workers Busness Executve and Managers Professonals Techncans & Assocate Professonals Clerks ervce Workers & hop & Market ales Workers Blue-Collar Workers Producton and Machne Operators & Related Workers Data ource: Yearbook of Manpower urvey tatstcs, Census Bureau, D.G.B.A.. 34

28 Table 2.9 Occupatonal Dstrbutons and Changes Wthn Manufacturng by Year (Accordng to Wang ) ( ) ( ) Total klled Employees Percent n Manufacturng Whte-Collar Workers Busness Executve and Managers Professonals Techncans & Assocate Professonals Clerks Blue-Collar Workers Producton and Machne Operators & Related Workers ervce Workers & hop & Market ales Workers Data ource: Yearbook of Manpower urvey tatstcs, Census Bureau, D.G.B.A. 35

29 2.4 Concludng Remarks ummary In 1980s, the busnesses operaton costs had ncreased a lot due to NT dollar apprecated relatve to U dollar. For ths reason, many busnesses started to transfer ther nvestments offshore and one of the man destnatons s Manland Chna. In order to prevent a large quantty of unemployment and trade crss from nvestng n Manland Chna, presdent Lee clamed a polcy of no hast, be patent and rule nto a legslated regulaton n Many studes about relatve demand shftng toward sklled workers (and thus cause unsklled workers unemployed) concluded that technologcal progress should be accountable for the major, rather than outsourcng or nternatonal trade. Actually, outsourcng has an equvalent effect lke non-neutral technologcal progress, so we cannot exclude any one from possble canddates. Through Feenstra and anson (1995), we know outsourcng wll cause relatve demand shftng away from unsklled workers and towards sklled workers. Wdenng wage nequalty between these two dfferent types of labor forces emerges. The tmng of these changes n Tawan labor markets has concded wth growth of outsourcng to Manland Chna, that s to say, when outsourcng to Manland Chna grew rapdly at the begnnngs of 1990s, some facts can be observed. Examne by emprcal evdence, we know that the predcted results of economcs lteratures are qute accurate, and thus can offer some good deas for polces makng. Frst, the employment of domestc manufacturng sharply declned 7% 36

30 from 34% to 27% durng the perod of 1989 to 1996, although t stopped fallng at 1996 (whch mght be the effects of no hast, be patent polcy by guess), ts scale was only 0.27% to 0.29% or so, however. econd, changes n the shares of sklled and unsklled employees n manufacturng to total employees n manufacturng ftted the result predcted by Feenstra and anson (1995): employment shares of sklled workers n manufacturng ncreased whle shares of unsklled decreased. uch changes n relatve demand reflected on ther relatve wages too. Thrd, outsourcng percentage of electrc & electronc related ndustres s the most among all manufacturng at present, so I repeat to observe the changes n relatve demand and relatve wage but focus on electrc & electronc related ndustres. The fndng s that: share of sklled workers total employment ncreased whle that of unsklled decreased n electrc & electronc related ndustres. The same trends also happened to changes n ther wage shares. There s one more surprsng and nterestng thng that, slopes of both types of workers total employment share and wage share n electrc & electronc related ndustres are steeper than those of the whole manufacturng. Through the statc analyses n equaton (2-12) and equaton (2-13), we clarfy that Tawan s stll the outsourced destnaton n electrc and electronc related ndustres. A general mplcaton we get s when some ndustry plays outsourced role more, then when the outsourcng level z* s hgher, the effects of outsourcng on relatve demand and wage nequalty wll be stronger probably. 37

31 2.4.2 Polcy Implcatons Frst, outsourcng s the result of equalzng producton cost, thus f government regulated lmtaton on outsourcng/ FDI to Manland Chna before reachng the equlbrum, producton neffcent would therefore emerge both n Tawan and Chna. At the same tme, we have understood that no hast, be patent polcy only had the temporary effects on stoppng the declnng share of manufacturng employment share. o we have no reasons to lmt the tradtonal ndustres movng out for lowerng producton cost and ncreasng proft. Furthermore, why not try to develop domestc technologcal skll level to mantan compettveness, nstead of prohbtng busnesses from outsourcng? econd, even f outsourcng wll wden the wage gap between sklled and unsklled workers, t dose not suggest a case for ncreased outsourcng lmtaton (achs and hatz, 1996; laughter, 1998). Foregn experence also teaches us that we should respond to the unemployment and wage nequalty by wdenng the premum on educaton, ncludng schoolng job tranng, whch s the better way to solve these problems. Thrd, Ms. O, the new Mnster of M.O.E.A, declared the new ndustral polcy that government would encourage FDI n order to strve for the advantage of busnesses. owever, the characterstcs of dfferent ndustres are dvergent so there should be dfferent ndustral polces applcable to dfferent features of each ndustry. To announce a rough and unform polcy wll probably do more harms than goods. For example, some ndustres n Tawan play more n the outsourced role and the reset play more n the outsourcng role. On the other words, our economc and ndustral polces should be long term and double- or even mult-drectonal. We shall take hgher-technologcal ndustres wth respect to outsourced ndustres and desgn a polcy to development and stay them n Tawan. Conversely, tradtonal ndustres can be taken n the respect of outsourcng ndustry for factor prce equalzaton. 38