Global value chains and the rise of income inequality

Report
Global Value Chains
and the Rise of Income Inequality
Marcel Timmer
Groningen Growth and Development Centre,
University of Groningen
Presentation at e-Frame final conference “GDP and Beyond”, 11 February 2014
The World input-output database (WIOD) project was funded by the European
Commission, Research Directorate General as part of the 7th Framework Programme,
Theme 8: Socio-Economic Sciences and Humanities. Grant Agreement no: 225 281
Introduction
Increasing income inequality in many countries around
the world in recent times. Mainly between
Capital owners and Highly-educated workers
Less-educated workers
Two competing hypotheses:
 International integration (trade and investment):
specialisation according to comparative advantage?
 Technological change: skill- and capital-bias?
Aim of this presentation
Introduce the concept of Global Value Chains (GVCs)
Provide trends in the changes in incomes for capital
and workers in Global Value Chains.
Argue that technological change might be an important
driver of increasing inequality, alongside trade.
Background
Based on recent study: Timmer, M.P., A.A. Erumban, B.
Los, R. Stehrer and G.J. de Vries (2014),"Slicing Up
Global Value Chains", forthcoming Journal of Economic
Perspectives, Spring 2014.
One of results of FP7 funded project (2009-2012):
World Input-Output Database project (WIOD)
(www.wiod.org)
Stylized Global Value Chain (GVC)
of a car
Metal
Plastic
Car body
Business
services
CAR
Engine
Value added distribution
in GVC
Country 1
Capital and
labour
Intermediate
goods
Domestic
intermediate
goods
Country 2
VA by
L2
Capital and
labour
Intermediate
goods
VA by
K2
VA by
L3
Domestic
intermediate
goods
Country 3
VA by
L1
VA by
K1
Capital and
labour
Final goods
for domestic
and foreign
demand
VA by
K3
Value added contributions to a
“car” from German industry
100%
90%
80%
70%
8%
16%
13%
19%
21%
60%
23%
50%
58%
42%
20%
Labour
elsewhere
Capital in
Germany
40%
30%
Capital
elsewehere
10%
Value added
distribution of
final output
from German
transport
equipment
manufacturing
GVC
(in millions)
Labour in
Germany
Source:
Figure 1
0%
1995
2011
Method and Data
Method : Input-output analysis (Miller and Blair, 2009)
Data: World Input-Output Tables representing flows of goods
and services across industries and countries, for 1995-2011
(www.wiod.org), based on:
 Times-series of input-output tables benchmarked to national accounts
 Bilateral trade classified by end-use
 Capital and workers by three types of educational attainment levels
Global value chain analysis done for 560 manufacturing
products (14 product groups times 40 countries-ofcompletion)
0
.1
.2
.3
.4
Share of value added by high-educated
workers in 560 global value chains
0
.1
.2
.3
High-skilled labor share in GVC (1995)
.4
1
.4
Factor shares in value added of
560 global value chains of manufactures
High edu
0
0
.1
.2
.3
High-skilled labor share in GVC (2008)
.2
.4
.6
.8
Capital
.2
.4
.6
Capital share in GVC (1995)
.8
0
1
.1
.2
.3
High-skilled labor share in GVC (1995)
.4
.2
.3
.4
.5
.6
Low edu
.1
0
0
.1
.2
.3
.4
.5
.6
Med edu
Low-skilled labor share in GVC (2008)
.7
.7
0
0
.1
.2
.3
.4
.5
Medium-skilled labor share in GVC (1995)
.6
.7
0
.1
.2
.3
.4
.5
Low-skilled labor share in GVC (1995)
.6
.7
Increasing income share (%)
for capital and high-edu workers:
at global level (all 560 GVCs)
8
6
4
Capital
2
High-educ
0
Med-educ
-2
Low-educ
-4
-6
All countries
Note: Percentage change in factor income shares in 560 global value chains
of manufactures, by region. Source: Timmer et al. (2014, Table 3)
both in rich and poor countries !
6.0
4.0
2.0
Capital
0.0
High-educ
-2.0
Med-educ
-4.0
Low-educ
-6.0
-8.0
Rich countries
Poor countries
Note: Percentage change in factor income shares in 560 global value chains
of manufactures, by region. Source: Timmer et al. (2014, Table 3)
Specialisation in the EU towards value added
by high-skilled workers and capital
(all manufactures GVCs)
40%
MS
35%
30%
CAP
25%
HS
20%
LS
15%
10%
Note: The graph shows value added by factors in EU 27 in
global final manufactures output (% of total EU value added)
Possible determinants
of factor income shares
From production theory: change in cost shares can be explained by:
 changes in factor prices,
 substitution elasticities across all factors in all countries and
 factor-biased technical change (in the vertical chain)
Some potential explanations:
 Increased possibilities for offshoring (“global surplus labour”) might
erode bargaining position of less educated workers
 Prices of natural resources increased + limited substitution
possibilities
 Declining ICT prices + complementarity of ICT and high skills
 Increased profit opportunities for capital due to bigger markets (e.g.
brand names or software systems)
Concluding remarks
Main finding: increasing income for capital and higheducated workers in many global value chains, both in
poor and rich countries.
This fits the notion of skill-biased technological change in
conjunction with international trade and fragmentation of
production.
Implications for international statistical systems
 World input-output tables are useful devices, also for
 Analyses of competitiveness and integration,
 “(Ecological) Footprinting”)
 Continued need for “physical” trade measures
 Many statistical challenges remain (e.g. trade in services and
intangibles, capital ownership, ….)
Background studies
Timmer, Marcel P., Bart Los, Robert Stehrer and Gaaitzen J. de Vries
(2013). “Fragmentation, Incomes and Jobs. An Analysis of European
Competitiveness.” Economic Policy 28(76):613–661.
Los, B., M.P. Timmer and G.J. de Vries (2014), “How global are
Global Value Chains? A New Approach to Measure International
Fragmentation”, forthcoming Journal of Regional Science,
Timmer, M.P., A.A. Erumban, B. Los, R. Stehrer and G.J. de Vries
(2014),"Slicing Up Global Value Chains", forthcoming Journal of
Economic Perspectives, Spring 2014.
Timmer (ed, 2012), “WIOD: concepts, construction and applications”,
WIOD working paper
Some characteristics of GVC
accounting
GVCs can only be analysed by choosing a particular final product
(group) as unit of analysis, not an industry or country. (e.g. industry 1
in country A delivers value added to production of final good X from
country B)
In work so far we focus on final manufacturing goods as they are
most fragmented.
Note that no distinction is made between products exported or used
domestically
Focus on value added rather than gross output or gross export.
DATA: World Input-Output Tables
(www.wiod.org)
 World Input-Output Table (WIOT) represents flows of goods and
services across industries and countries (40 countries and rest-of-the world region), 1995-2011. Two data challenges in construction:
1. Times-series of input-output tables.
 Based on harmonised official benchmark national supply and use
tables (34 industries and 59 product groups)
 Adjusted to, and interpolated with, industry output and main final
demand time series from the National Accounts (RAS-like method)
2. Allocation of imports to three use categories
 using improved BEC-classification (based on COMTRADE HS 6digit level) rather than standard proportionality assumption (Feenstra
and Jensen, 2012)
 Breakdown of imports by country of origin, using bilateral trade
statistics on goods and services (export shares by mirroring imports)
DATA: factor incomes by
industry-country
 Wages and quantities of labour by skill type
 Number of workers (incl. self-employed) by three skill types based
on levels of educational attainment (ISCED classification)
 Wages reflect total costs for employer, including imputed wage for
self-employed workers (Gollin, JPE, 2002)
 For advanced countries data taken from EU KLEMS database (see
O’Mahony and Timmer, 2009)
 Other countries: similar methodology based on country-specific
labour force surveys and additional materials (Erumban et al., 2011)
 Capital income is defined as residual such that the accounting identity
will hold:
 capital income = value added minus labour compensation.
 It reflects income to all capital assets, including intangibles
Worldwide (all 560 GVCs):
Increasing income for capital and high-edu labour
Note: Percentage change in factor income shares in 560 global value chains
of manufactures, worldwide. Source: Timmer et al. (2014, Table 2)
Value added to global output of final
manufactures, 1995 and 2008
1995
Total value added (billion US$), by
capital (%)
high-skilled labor (%)
medium-skilled labor (%)
low-skilled labor (%)
2008
Change
6,586
8,684
2,098
40.9
13.8
28.7
16.6
47.4
15.4
24.4
12.8
6.5
1.5
-4.2
-3.8
Note: Breakdown of value added to global output of all final manufactures by factor of
production. Value added is at basic prices (hence excluding net taxes, trade and transport
margins on output). It is converted to US$ with official exchange rates and deflated to 1995
prices with the US CPI. Figures may not add due to rounding.
Source: Author’s calculations based on World Input-Output Database, April 2013.

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