Research Highlights

Measuring the effects of offshoring

During the early 2000s, much of the residential furniture industry moved to Asia, where production costs are much lower than in the United States. American consumers benefitted from lower prices at the stores, while furniture factories in states like North Carolina shuttered and those that remained open increasingly assembled parts made overseas. In the seven years leading up to the Great Recession, employment in the U.S. residential furniture industry fell by over 40 percent.

Variations on this scenario have played out in many industries here and in other advanced countries. Yet, as explained in Measuring Globalization: Better Trade Statistics for Better Policy, official data likely misses much of this offshoring dynamic, resulting in biased statistics and hampering policymakers’ understanding of the consequences of globalization.

The phenomenon of offshoring and the related shifts in the location of production from advanced to emerging economies have been driven to a large degree by price differences. In today’s global economy, characterized by rapid shifts in sourcing from high to low-cost suppliers, price deflators must capture these price differences in order to accurately measure how much (in quantity terms) is imported and how much is made domestically.  But they don’t.

Returning to the furniture example, because price deflators fail to capture the price differences between imported and domestically produced parts, the real (quantity) growth of imported parts will be understated and the real growth of domestic value-added along with productivity measures will be overstated when offshoring occurs. Research reported in Measuring Globalization finds that recent shifts in the global sourcing of products may have resulted in substantial biases in key import, output, and productivity statistics in manufacturing industries in the United States, Europe and Japan. These biases, in turn, potentially distort policymakers’ assessment of the international competitiveness of domestic industries and the causes of job loss.

Fixing these problems will require new data and approaches. To reduce biases, price index experts Alice Nakamura, Erwin Diewert, John Greenlees, Leonard Nakamura, and Marshall Reinsdorf argue that statistical agencies will need to utilize large firm-level databases on transactions prices. William Alterman, former Assistant Commissioner of International Prices at the Bureau of Labor Statistics, proposes a new input price survey to mitigate biases from shifts in sourcing.

By Susan Houseman

Research Highlights