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

CAR

Business services

Plastic

Metal

Car body Engine

Value added distribution in GVC

Country 1Capital and

labourIntermediate

goods

Domestic intermediate

goods

Country 2Capital and

labourIntermediate

goods

Domestic intermediate

goods

Country 3Capital and

labourFinal goods

for domestic and foreign

demand

VA by L1

VA by K1

VA by L2

VA by K2

VA by L3

VA by K3

Value added contributions to a “car” from German industry

Value added distribution of final output from German

transport equipment

manufacturing GVC

(in millions)

Source: Figure 1

58%42%

21%

23%

13%

19%

8%16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 2011

Capitalelsewehere

Labourelsewhere

Capital inGermany

Labour inGermany

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-of-completion)

Share of value added by high-educated workers in 560 global value chains

0.1

.2.3

.4H

igh-s

kille

d la

bor

sha

re in

GV

C (

20

08

)

0 .1 .2 .3 .4High-skilled labor share in GVC (1995)

Factor shares in value added of 560 global value chains of manufactures

0.2

.4.6

.81

Cap

ital s

hare

in G

VC

(2

00

8)

0 .2 .4 .6 .8 1Capital share in GVC (1995)

0.1

.2.3

.4H

igh-s

kille

d la

bor

sha

re in

GV

C (

20

08

)

0 .1 .2 .3 .4High-skilled labor share in GVC (1995)

0.1

.2.3

.4.5

.6.7

Me

diu

m-s

kille

d la

bor

sha

re in

GV

C (

2008

)

0 .1 .2 .3 .4 .5 .6 .7Medium-skilled labor share in GVC (1995)

0.1

.2.3

.4.5

.6.7

Low

-ski

lled la

bo

r sh

are

in G

VC

(2

00

8)

0 .1 .2 .3 .4 .5 .6 .7Low-skilled labor share in GVC (1995)

Capital High edu

Low eduMed edu

Increasing income share (%) for capital and high-edu workers:

at global level (all 560 GVCs)

Note: Percentage change in factor income shares in 560 global value chains of manufactures, by region. Source: Timmer et al. (2014, Table 3)

-6

-4

-2

0

2

4

6

8

All countries

Capital

High-educ

Med-educ

Low-educ

both in rich and 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)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Rich countries Poor countries

Capital

High-educ

Med-educ

Low-educ

Specialisation in the EU towards value added by high-skilled workers and capital

(all manufactures GVCs)

Note: The graph shows value added by factors in EU 27 in global final manufactures output (% of total EU value added)

10%

15%

20%

25%

30%

35%

40%

MS

CAP

HS

LS

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 high-educated 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, ….)

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

Background studies

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 6-

digit 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)

  1995 2008 Change

Total value added (billion US$), by 6,586 8,684 2,098

capital (%) 40.9 47.4 6.5 high-skilled labor (%) 13.8 15.4 1.5 medium-skilled labor (%) 28.7 24.4 -4.2 low-skilled labor (%) 16.6 12.8 -3.8       

Value added to global output of final manufactures, 1995 and 2008

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.