A Myth Worthy of Debunking: Investment by U.S. Corporations in Foreign Operations Kills American Manufacturing Jobs
June 2, 2011
Most of us don’t, but if you happen to have the first 2009 issue of the American Economic Journal: Economic Policy, vol. 1, issue 1 lying around, by all means take time to flip through pages 181-203. The article contained therein—Domestic Effects of the Foreign Activities of U.S. Multinationals by Desai, Foley and Hines—may look quantitatively intimidating (and rightfully so), but it comes to a remarkably simple conclusion: Foreign expansion by U.S. multinational manufacturing firms not only creates U.S. manufacturing jobs, it increases domestic wages.
This runs counterintuitive to most citizens’ instincts. If a firm invests overseas, it must be the case that domestic jobs are lost. After all, a company only has so much money to spread around the world. Thus, one tends to assume an accompanying loss of aggregate domestic employment. However, the word “aggregate” in the previous sentence is crucial.
Every potential industry worker benefits when a manufacturing company invests in foreign operations. The Desai, Foley, and Hines paper convincingly concludes that “…10% higher numbers of foreign employees is associated with 2.3% higher number of domestic employees,” and “…10% higher foreign employment compensation is associated with 2.5% greater domestic employment compensation.”
For example, say a company employs 1,000 people in the U.S. and 100 in foreign countries. Domestic workers in this hypothetical company are paid, on average, $40,000/year and its foreign employees make $10,000/year. The findings above suggest that in this scenario, if the company increased investment abroad to add 10 foreign employees, 23 new employees would be hired for U.S. operations. In addition, if the company decided to increase foreign worker compensation by $1,000/year, U.S. workers should expect to reap a higher annual salary of $41,000.
The industry’s workers (who produce 22% of U.S. GDP) may find a real-world example given in the paper calming:
Between 2000 and 2006, Caterpillar increased its foreign employment by 49%, to the point that foreign employment constituted half of its total global employment. Over this period, Caterpillar’s U.S. exports, a fraction of which were sent to its foreign affiliates, grew by 104%, and its U.S. employment grew by 29%.
You may wonder how these findings are remotely related to tax policy and corporate tax reform. However, current raging debate surrounding corporate taxation is widespread and evidenced in David McKinnon’s May 26th and June 1st articles in The Wall Street Journal. In the past few months arguments have ranged from whether large, multinational corporations pay any tax at all to whether the United States’ tax code needs revision designed to simplify the repatriation of corporate income. The latter reform would make expansion more attractive to U.S. multinationals, and is thus one tax reform which workers in the manufacturing industry can certainly support.
For further reading concerning more comprehensive federal corporate tax reform, please see a comprehensive Tax Foundation Special Report by Tax Foundation President Scott Hodge, and a thorough April 2011 study released by Business Roundtable.