The Labor Market Effects of Offshoring by U.S. Multinational Firms: Evidence from Changes in Global Tax Policies

Abstract

Estimating the causal effect of offshoring on domestic employment is notoriously difficult because of the inherent simultaneity of domestic and foreign affiliate employment decisions. We use a model of endogenous offshoring to characterize this simultaneity and to derive an instrumental variables strategy allowing us to estimate the impact of offshore hiring on domestic employment. Our IV strategy exploits variation in offshoring costs across countries, industries, and time that results from the implementation of bilateral tax treaties, and uses Bureau of Economic Analysis (BEA) firm-level data for U.S. multinationals across two decades. We confirm that new treaties are unrelated to existing employment trends, and proceed to estimate the effects of offshoring on U.S. employment within multinational firms, industry-wide, and within local labor markets. We find that a 10 percent increase in foreign affiliate employment increases domestic U.S. employment for existing multinational firms by 1.4 percent, consistent with increased scale of production following a decline in global production costs. However, industry-wide U.S. employment increases by only one-third as much, as the opening of new offshore production facilities generates substitution for workers that had been hired domestically. We estimate slightly larger effects for local labor markets, suggesting there are possible spillovers across industries in the same location. Throughout the analysis, OLS estimates, which fail to account for the simultaneity of domestic and offshore employment, are more than 3 times larger than the preferred IV estimates. Overall, our results indicate that greater offshore activity raises net employment by U.S. firms.