Offshoring and the Skill Structure of Labour Demand Neil Foster*, - - PowerPoint PPT Presentation

SLIDE 1

 wiiw iiw

1 Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies

www.wiiw.ac.at

Neil Foster*, Robert Stehrer*, Marcel Timmer#, Gaaitzen de Vries#

* The Vienna Institute for International Economic Studies (wiiw)

# The University of Groningen

Final WIOD Conference: Causes and Consequences of Globalization, Groningen, 24-26 April 2012

Offshoring and the Skill Structure of Labour Demand

The WIOD-project is 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.

SLIDE 2

 wiiw iiw

2

Offshoring and Labour Markets

• From the 1980s onwards many countries have seen changes in the relative wage

and employment of skilled versus non-skilled workers

• For many developed (but also developing countries) an increase in relative wages and/or employment

have been observed (Feenstra, 2007)

• Data – at least for the US – since 2000 are less easy to summarise (Feenstra, 2010)
• Declines in transport and communication costs have made it possible to break apart

the production process, with various stages occurring in different countries

• Fragmentation, foreign outsourcing, offshoring
• Particularly for EU countries: opening up of Eastern European countries with high share of medium

educated employed persons

• Such offshoring generates trade in intermediate inputs, which dominates trade flows
• Intermediates represent 55% of goods trade and more than 70% of services trade
• These shares have been fairly stable since the mid-1990s at least, but the levels of intermediate trade

have grown with trade in general

SLIDE 3

 wiiw iiw

3

Offshoring and Labour Markets

• To which extent is offshoring a cause of these changes in relative labour demand?
• Offshoring differs importantly from import penetration in final goods in the sense that it

explicitly takes into account the extent to which firms move production (and service) activities abroad.

• Labour demand is therefore likely to be affected not only in import-competing industries, but also in all

industries that use foreign inputs and services.

• The impact of offshoring on the labour market may not be limited to changing labour

demands between industries therefore, but may also affect the relative demand for labour within industries.

• In particular, unskilled labour-intensive stages of production tend to be shifted to unskilled labour-abundant

developing countries, while more technologically advanced stages remain in skilled labour-abundant developed countries.

• Offshoring also helps countries to keep part of industries rather than loosing the whole

industry

SLIDE 4

 wiiw iiw

4

Offshoring and Labour Markets

• Production offshoring has lead to the fear in developed countries especially that
• utsourcing will tend to reduce the demand for relatively unskilled workers therefore,

resulting in either falling wages of unskilled labour and/or increased unemployment of unskilled labour.

• From a theoretical perspective however, it is by no means clear that this will be the case in a general

equilibrium setting (e.g. Jones and Kierzkowski, 2001; Kohler, 2004).

• Alternative explanations: skill-biased technological change, institutions, supply-side changes

SLIDE 5

 wiiw iiw

5

Evidence on Offshoring and the Demand for Skilled Labour

• A number of empirical studies examine the impact of production offshoring on the

demand for skilled labour in developed countries (usually concentrating on specific countries)

• Examples: Feenstra and Hanson (1996; US), Falk and Koebel (2002; Germany);

Strauss-Kahn (2003; France), Hijzen et al (2005; UK)

• Results tend to suggest that offshoring impacts negatively upon the demand for unskilled

labour (exception Falk and Koebel, 2002)

• Despite such results the ‘consensus view’ is that trade was not the major reason for

rising wage inequality in the 80s and 90s, with skill biased technological change cited as the major reason

• The results of Feenstra and Hanson (1996) for example suggest that trade contributed around 31

percent of the increase in non-production wages

SLIDE 6

 wiiw iiw

6

Empirical Model

• Empirical model is based upon the estimation of a translog cost function (see

Berman et al., 1994)

• Based on this framework the estimating equation is:
• Where:
• s is the share of factor i in total variable costs (i.e. labour and intermediate inputs)
• w are factor rewards
• K is the capital stock (split into an ICT and non-ICT component)
• GO is gross output
• IID and IIM are measures of domestic and imported intermediate use respectively

SLIDE 7

 wiiw iiw

7

Data and Estimation

• The model is estimated for 18 countries and 29 industries over the

period 1995-2007

• We limit ourselves to countries for which we have ICT and non-ICT capital data from EU-

Klems

• Some (non-offshorable?) services industries are excluded along with coke, refined

petroleum and nuclear fuel

• Rather than impose the same cost function on all industries we

(additionally) report results for different industry types (low, medium, high tech; services and manufacturing)

SLIDE 8

 wiiw iiw

8

Elasticities

• The elasticity of factor demand for factor j with respect to a change in

factor prices will be given by: where

• The elasticity of factor demand with respect to a change in the capital

stock, output, and domestic and imported intermediates will be given by:

if

SLIDE 9

 wiiw iiw

9

Measuring Offshoring

• Intra-Industry (Narrow) Offshoring:

Share of imported intermediate inputs from same industry

• Inter-Industry (Broad) Offshoring:

Share of imported intermediate inputs from other industries

• O – Imported intermediate purchases
• V – Value-added
• Analogous measures are constructed for domestic intermediate use

SLIDE 10

 wiiw iiw

10

Narrow Offshoring

• 0.05

0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 aus aut bel cze deu dnk esp fin fra gbr hun irl ita jpn nld svn swe usa Change between 1995 and 2007 1995

SLIDE 11

 wiiw iiw

11

Broad Offshoring

0.1 0.2 0.3 0.4 0.5 0.6 0.7 aus aut bel cze deu dnk esp fin fra gbr hun irl ita jpn nld svn swe usa Change between 1995 and 2007 1995

SLIDE 12

 wiiw iiw

12

Cost Shares in 1995 and Changes between 1995 and 2007

Country Low-Skilled Medium-Skilled High-Skilled 1995 Change 1995 Change 1995 Change Australia 0.141

• 0.021

0.116 0.009 0.038 0.018 Austria 0.064

• 0.025

0.266

• 0.067

0.046 0.016 Belgium 0.121

• 0.064

0.130 0.013 0.043 0.004 Czech Republic 0.013

• 0.002

0.151 0.019 0.029 0.013 Germany 0.045

• 0.009

0.236

• 0.057

0.099

• 0.005

Denmark 0.079

• 0.003

0.199

• 0.050

0.063 0.014 Spain 0.189

• 0.082

0.056 0.010 0.075 0.024 Finland 0.101

• 0.047

0.137

• 0.010

0.097 0.007 France 0.110

• 0.044

0.144

• 0.010

0.082 0.015 Great Britain 0.116

• 0.042

0.153 0.006 0.091 0.038 Hungary 0.040

• 0.014

0.188

• 0.027

0.064 0.012 Ireland 0.113

• 0.048

0.125

• 0.022

0.057 0.036 Italy 0.183

• 0.078

0.107 0.024 0.029 0.005 Japan 0.059

• 0.032

0.219

• 0.024

0.080 0.011 Netherlands 0.116

• 0.039

0.160

• 0.028

0.049 0.030 Slovenia 0.052

• 0.019

0.226

• 0.051

0.070 0.012 Sweden 0.087

• 0.034

0.191

• 0.015

0.047 0.020 USA 0.033

• 0.006

0.216

• 0.016

0.103 0.017

SLIDE 13

 wiiw iiw

13

Regression Results for Narrow Offshoring 1

(1) (2) (3) VARIABLES 0.00190

• 0.00613**

0.0482*** (0.00191) (0.00245) (0.00198)

• 0.0143***

0.0932***

• 0.0178***

(0.00271) (0.00349) (0.00282) 0.0387***

• 0.00482***
• 0.0135***

(0.00126) (0.00163) (0.00132) 0.00636*** 0.000415

• 0.00263

(0.00215) (0.00277) (0.00224) 0.000432 0.00135* 0.000700 (0.000568) (0.000730) (0.000591) 1.70e-05 0.00147** 0.000479 (0.000456) (0.000586) (0.000474)

• 0.0292***
• 0.0739***
• 0.0305***

(0.00167) (0.00214) (0.00173)

• 0.00265***
• 0.00495***
• 0.00170***

(0.000406) (0.000522) (0.000422)

• 0.00146***
• 0.00464***
• 0.00195***

(0.000360) (0.000463) (0.000374) Observations 4,773 4,773 4,773 R-squared 0.367 0.398 0.252

SLIDE 14

 wiiw iiw

14

Regression Results for Narrow Offshoring 2

(1) (2) (3) VARIABLES All Industries

• 0.00265***
• 0.00495***
• 0.00170***

(0.000406) (0.000522) (0.000422) Manufacturing – Low

• 0.00192
• 0.00934***
• 0.00408***

(0.00174) (0.00202) (0.00141) Manufacturing - Medium

• 0.00375***
• 0.00620***
• 0.00348**

(0.00133) (0.00173) (0.00156) Manufacturing - High

• 0.00418***
• 0.0142***
• 0.00690***

(0.00129) (0.00156) (0.00131) Services - Low

• 0.00109
• 0.000825

0.00106 (0.00110) (0.00126) (0.000885) Services – Medium

• 0.00229***
• 0.00213**
• 0.000491

(0.000692) (0.000898) (0.000649) Services - High 0.000714 0.000199

• 0.000526

(0.000975) (0.00148) (0.00184)

SLIDE 15

 wiiw iiw

15

Results for Narrow Offshoring - Elasticities

(1) (2) (3) VARIABLES All Industries

• 0.03753
• 0.03089
• 0.0217

Manufacturing – Low

• 0.02204
• 0.06299
• 0.07129

Manufacturing - Medium

• 0.05382
• 0.04311
• 0.05378

Manufacturing - High

• 0.0773
• 0.12301
• 0.12573

Services - Low

• 0.01049
• 0.0037

0.016168 Services – Medium

• 0.03514
• 0.01262
• 0.00635

Services - High 0.016847 0.001056

• 0.00248

SLIDE 16

 wiiw iiw

16

Regression Results Including Broad Offshoring 1

(1) (2) (3) VARIABLES 0.000189

• 0.00541**

0.0477*** (0.00189) (0.00230) (0.00193)

• 0.0216***

0.0918***

• 0.0205***

(0.00262) (0.00317) (0.00267) 0.0451***

• 0.00648***
• 0.0121***

(0.00103) (0.00125) (0.00105) 0.00649***

• 6.99e-05
• 0.00402*

(0.00215) (0.00260) (0.00219)

• 0.000216

0.00230*** 0.000850 (0.000558) (0.000676) (0.000569)

• 0.00178***
• 0.00339***
• 0.00189***

(0.000477) (0.000578) (0.000486)

• 0.0271***
• 0.0690***
• 0.0289***

(0.00164) (0.00199) (0.00167)

• 0.00146***
• 0.00212***
• 0.000380

(0.000412) (0.000499) (0.000419)

• 0.000599*
• 0.00273***
• 0.00107***

(0.000364) (0.000441) (0.000371)

• 0.00148
• 0.00695***
• 0.00443***

(0.000991) (0.00120) (0.00101)

• 0.0146***
• 0.0296***
• 0.0148***

(0.00139) (0.00168) (0.00141) Observations 4,773 4,773 4,773 R-squared 0.366 0.465 0.282

SLIDE 17

 wiiw iiw

17

Regression Results Including Broad Offshoring 2

(1) (2) (3) VARIABLES NARROW OFFSHORING Manufacturing – Low 0.000501

• 0.00603***
• 0.00226*

(0.00166) (0.00191) (0.00135) Manufacturing - Medium

• 0.00108
• 0.00238
• 0.00149

(0.00130) (0.00165) (0.00155) Manufacturing - High

• 0.00134
• 0.00760***
• 0.00274**

(0.00133) (0.00161) (0.00133) Services - Low

• 0.00215*
• 0.000485

0.00182** (0.00113) (0.00122) (0.000894) Services – Medium

• 0.00149**
• 0.000819
• 0.000129

(0.000704) (0.000835) (0.000637) Services - High 0.000388 0.00108

• 0.000841

(0.000988) (0.00146) (0.00175) BROAD OFFSHORING Manufacturing – Low

• 0.00221
• 0.00615**
• 0.00468**

(0.00252) (0.00292) (0.00206) Manufacturing - Medium

• 0.00183
• 0.00672**
• 0.00475

(0.00258) (0.00326) (0.00307) Manufacturing - High 0.00219

• 0.00456*
• 0.00387*

(0.00199) (0.00240) (0.00198) Services - Low 0.00685

• 0.0104**
• 0.00717**

(0.00430) (0.00465) (0.00341) Services – Medium

• 0.00481***
• 0.00713***
• 0.00194

(0.00166) (0.00197) (0.00150) Services - High 0.00391

• 0.00551
• 0.00186

(0.00279) (0.00411) (0.00495)

SLIDE 18

 wiiw iiw

18

Regression Results Including Broad Offshoring - Elasticities

(1) (2) (3) VARIABLES NARROW OFFSHORING All Industries

• 0.02068
• 0.01323
• 0.00485

Manufacturing – Low 0.00575

• 0.04066
• 0.03949

Manufacturing - Medium

• 0.0155
• 0.01655
• 0.02303

Manufacturing - High

• 0.02478
• 0.06584
• 0.04993

Services - Low

• 0.02069
• 0.00218

0.027761 Services – Medium

• 0.02287
• 0.00485
• 0.00167

Services - High 0.009155 0.005731

• 0.00396

BROAD OFFSHORING All Industries

• 0.02096
• 0.04336
• 0.05654

Manufacturing – Low

• 0.02536
• 0.04147
• 0.08177

Manufacturing - Medium

• 0.02626
• 0.04673
• 0.0734

Manufacturing - High 0.040498

• 0.0395
• 0.07052

Services - Low 0.065918

• 0.04666
• 0.10937

Services – Medium

• 0.07382
• 0.04223
• 0.02509

Services - High 0.092256

• 0.02924
• 0.00876

SLIDE 19

 wiiw iiw

19

Offshoring and employment levels

• Offshoring has
• Productivity effect which tends to have negative effect on labour demand
• Scale effect which tends to have positive effect on labour demand
• Estimation strategy
• Conditional labour demand equation (for productivity effect)
• Unconditional labour demand equation (for total effect)
• Scale effect is difference between total and productivity effect

∑ ∑

+ + + + =

l ilct l ict y j ict k ict j ict

z y k w L γ β β α α ln ln ln ln

∑ ∑

+ + + + =

l ilct l ict p j ict k ict j ict

z p k w L γ β β α α ln ln ln ln

SLIDE 20

 wiiw iiw

20

Offshoring and employment levels

Conditional Unconditional All All

Wage/Materials Price

• 0.137***
• 0.0834***

(0.00886) (0.00937) Log Capital Stock 0.550*** 0.669*** (0.0133) (0.0137) Log Output 0.184*** (0.0112) Log Price 0.0892*** (0.0117) Log ICT Share

• 0.159***
• 0.178***

(0.00966) (0.0107) Intra-Ind. Offshoring

• 0.0417***

0.00169 (0.014) (0.0148) Inter-Ind. Offshoring

• 0.0431**
• 0.0138

(0.0182) (0.0207) Year Dummies Yes Yes Observations 7,922 7,922 R-squared 0.688 0.653 F 261.4*** 283.8***

• Productivity effect is negative
• Total effect is insignificant
• Scale effect compensates productivity

SLIDE 21

 wiiw iiw

21

Offshoring and employment levels – further results

• Similar results when looking at manufacturing only
• Results at country level broadly consistent with these results
• Productivity effect tends to be significantly negative in most countries
• Overall effect however mixed
• Results at industry level rather heterogeneous
• Negative total effect in textiles, rubber and plastics, electrical equipment and transport

equipment

• In services generally insignificant, though negative in hotels and restaurants; positive in business

services

• Results by skill categories – still have to come

SLIDE 22

 wiiw iiw

22

Summary

• Narrow and Broad Offshoring have impacted (negatively) upon cost

shares for all types of labour

• The coefficients are often found to be larger in absolute value when considering the

medium-skilled cost share

• Due to the relatively large shares of medium-skilled workers however results when

considering elasticities are less clear-cut, being larger for low-skilled workers when considering the full sample

• Note: Share of high educated was rising, thus offshoring tends to dampen increases
• Considering differences across industry types:

− Few significant effects are found in services industries (med-skill services) − Offshoring has particularly strong negative effects in high-tech manufacturing − Offshoring tends to impact more strongly on medium- and high-skilled cost shares in manufacturing industries

• Employment levels: Scale effect dominates productivity effect
• Data with cross-country and cross-industry dimension allow for more

differentiated discussion

SLIDE 23

 wiiw iiw

23

Industry groups - manufacturing

SLIDE 24

 wiiw iiw

24

Industry groups - services