Outsourcing of Services, Imported Materials and the Demand for Heterogeneous Labour: An Application of a Generalised Box-Cox Function

Over the last decades manufacturers have outsourced service inputs and shared resources with competitors. As a result, service inputs have been the fastest growing input factor in German manufacturing, followed by imported materials and high skilled labour. Intermediate services and imported materials both at constant prices rose by 4.7 and 4.2 percent per year between 1978 and 1990. Most of the rise in intermediate services as a factor of production in manufacturing can be attributed to the growing importance of business services, representing 45 percent of total intermediate services in 1990 compared to 35 percent in 1978. For the U.S. several empirical studies provide evidence that manufacturing firms contract out business services to realize labour cost savings. In particular, low skilled tasks are outsourced because manufacturing firms have no opportunity to pursue a different compensation strategy between skilled and unskilled workers. This study constitutes the first attempt to examine the effects of the increasing use of service inputs as well as imported materials on heterogeneous labour demand. We analyse the substitution possibilities more completely than in previous studies. Besides, we formulate a new variant of a Box-Cox cost function nesting both the normalised quadratic and the translog functional form. Our main result is that both the increasing use of services and imported materials do not contribute to the shift away from unskilled labour.

Falk, Martin and Bertrand Koebel (2000), Outsourcing of Services, Imported Materials and the Demand for Heterogeneous Labour: An Application of a Generalised Box-Cox Function, ZEW Discussion Paper No. 00-51, Mannheim.