Outsourcing and the Rise in Services

This paper investigates the impact of outsourcing on sectoral reallocation in the U.S. over the period 1948-2002. Roughly 40% of the growth of the service sector comes from professional and business services. This is an unusual industry as more than 90% of its output is an intermediate input to other firms, and it is where most of the service outsourcing activity is concentrated. These facts are essential to understanding the structure of the economy: professional and business services have experienced an almost fourfold increase in their forward linkage, the largest change in input-output linkages over the past 60 years. Using a simple gross output accounting model, I calculate the contribution of the change in the composition of intermediates and their sourcing mode to the reallocation of employment across sectors. I find that the evolution of the input-output structure, which is mostly due to professional and business services outsourcing, accounts for 36% of the increase in services employment and 25% of the fall in manufacturing.