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Journal of Economic Perspectives: Vol. 25 No. 2 (Spring 2011)

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Offshoring Bias in U.S. Manufacturing

Article Citation

Houseman, Susan, Christopher Kurz, Paul Lengermann, and Benjamin Mandel. 2011. "Offshoring Bias in U.S. Manufacturing." Journal of Economic Perspectives, 25(2): 111-32.

DOI: 10.1257/jep.25.2.111

Abstract

In this paper, we show that the substitution of imported for domestically produced goods and services—often known as offshoring—can lead to overestimates of U.S. productivity growth and value added. We explore how the measurement of productivity and value added in manufacturing has been affected by the dramatic rise in imports of manufactured goods, which more than doubled from 1997 to 2007. We argue that, analogous to the widely discussed problem of outlet substitution bias in the literature on the Consumer Price Index, the price declines associated with the shift to low-cost foreign suppliers are generally not captured in existing price indexes. Just as the CPI fails to capture fully the 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. As a result, the real growth of imported inputs has been understated. And if input growth is understated, it follows that the growth in multifactor productivity and real value added in the manufacturing sector have been overstated. We estimate that average annual multifactor productivity growth in manufacturing was overstated by 0.1 to 0.2 percentage point and real value added growth by 0.2 to 0.5 percentage point from 1997 to 2007. Moreover, this bias may have accounted for a fifth to a half of the growth in real value added in manufacturing output excluding the computer and electronics industry.

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Authors

Houseman, Susan (Upjohn Institute for Employment Research, Kalamazoo, MI)
Kurz, Christopher (Federal Reserve Board)
Lengermann, Paul (Federal Reserve Board)
Mandel, Benjamin (Federal Reserve Board)

JEL Classifications

C43: Index Numbers and Aggregation; leading indicators
E23: Macroeconomics: Production
E31: Price Level; Inflation; Deflation
L24: Contracting Out; Joint Ventures; Technology Licensing
L60: Industry Studies: Manufacturing: General

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