Traded Non Tradables

Research Seminars

Offshoring Services Through Labour Mobility

The paper presented in this ZEW Research Seminar shows that locally-provided "non tradable" services can be offshored on-site through foreign employees geographical mobility. To shed light on this issue, the author studies the largest historical experiment of services exports mobility liberalization in the world: the European posting policy. Within the EU, firms are free to send their employees abroad in order to perform any service. Workers "posted" abroad benefit from destination-level minimum legal wage, but are exempted from all labour taxes in the destination country. Assembling novel and exhaustive administrative data on this continent-wide experiment, the autor shows that on-site offshoring exposes novel firms and workers to foreign competition, and leads mobility and prevailing wage and tax policies to play the role of standard trade policies. The paper presented in this ZEW Research Seminar shows that the staggered lifting of posting mobility restrictions increased permanently international service provision by 500% within the EU. Non tradables trade has been highly responsive to tax rules applied to posted workers. Combining quasi-experimental payroll tax and minimum wage reforms with a theory-consistent gravity estimation, the author finds that the elasticity of non tradable services trade flows is 1.1, which is closer to a migration than a trade elasticity. The author then turns to the unequal distribution of these aggregate mobility-trade effects, both between and within countries. Liberalizing on-site offshoring redistributed economic activity and tax revenue to sending — mostly low-wage — countries, increasing non-tradable employment in sending countries by 17% and taxes paid at home by sending firms by 30%, while employment in exposed sectors in receiving countries decreases by 6%. Using detailed firm-level data, the paper presented in this ZEW Research Seminar shows that workers' wage rate rise by 10%, while capital-owners increase their profits by 30%, after a firm starts posting workers abroad, implying that services suppliers in formerly non-tradable sectors captured 2/3 of the overall mobility-dependent export premium. These gains however disappear when the posting mission ends, suggesting little "learning by exporting" in non tradable sectors. The author further finds evidence that origin-level wage gains from on-site offshoring are driven by prevailing wage regulations that do not apply to standard trade. Using my estimates, the author quantifies that implementing a prevailing payroll tax policy to ensure “equal tax treatment” as recently proposed by the European Parliament would decrease non tradable trade within EU by 30%.