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Offshoring and the skill structure of labour demand

Abstract

In this paper we examine the link between international outsourcing—or offshoring—and the skill structure of labour demand for a sample of 40 countries over the period 1995–2009. The paper uses data from the recently compiled World Input–Output Database to estimate a system of variable factor demand equations. These data allow us to exploit both a cross-country and cross-industry dimension and split employment into three skill categories. Our results indicate that while offshoring has impacted negatively upon all skill levels within industries, the largest impacts have been observed for medium-skilled workers. Such results are consistent with recent evidence indicating that medium-skilled workers have suffered to a greater extent than other skill types in recent years.

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Notes

  1. 1.

    Note that while materials inputs are treated as flexible since we have data on prices for this variable we are forced to assume that offshoring and domestic outsourcing are quasi-fixed, since we don’t have separate prices for domestic and imported intermediate inputs.

  2. 2.

    Models of the production process often follow a two-stage setup. Authors differ in their approach. For example, Autor et al. (2003) assume industry output uses routine and non-routine tasks that can be done by workers of different skill types, where capital can substitute for labour doing routine tasks. Grossman and Rossi-Hansberg (2008) assume two goods are produced domestically using a continuum of offshorable tasks done by domestic or foreign low-skilled labour and a continuum of non-offshorable tasks done by domestic high-skilled labour.

  3. 3.

    The 35 industries are listed in Table 13 of the “Appendix”.

  4. 4.

    As it turns out including this industry (and the excluded service industries) doesn’t affect our results qualitatively. These results are available upon request.

  5. 5.

    Hijzen et al. (2005) mention two potential problems with the use of IO tables to calculate offshoring measures. The first is that concentrating on intermediates necessarily ignores the possibility of offshoring the final production stages, and the second is that the data do not capture offshoring when products are not re-imported, but exported to third markets.

  6. 6.

    Hijzen et al. (2005) note that this distinction is not without problems, most notably due to the way industries are defined in the data. They consider the example of two industries in which outsourcing is important, namely ‘motor vehicles and parts’ and ‘textiles’, noting that while ‘motor vehicles and parts’ is a single industry in the UK IO table, ‘textiles’ consists of up to ten industries.

  7. 7.

    While it is common in empirical applications to pool data across industries, thereby assuming that the same cost function applies across industries (see for example Feenstra and Hanson 1999; Michaels et al. 2013) it is somewhat restrictive (albeit necessary in single-country studies).

  8. 8.

    The group of countries classified as developed are: Australia, Austria, Belgium, Canada, Cyprus, Denmark, Germany, Finland, France, Ireland, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden, Taiwan, the United Kingdom and the United States.

  9. 9.

    We also tried splitting countries according to their average wage rates (i.e. into countries above and below the median). This led to a very similar split of countries to that used and results didn’t differ greatly. For this reason we report the results from the split into developed and developing countries only. Results from the split according to wage rates are available upon request.

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Acknowledgments

This paper is part of the World Input–Output Database (WIOD) project 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. More information on the WIOD project can be found at www.wiod.org. Foster-McGregor and Stehrer acknowledge funding from the Jubiläumsfonds of the Austrian National Bank (OeNB), grant number 14455. The authors would like to thank the referees for earlier comments on this paper as well as participants in the final WIOD conference in Groningen. All remaining errors are our own.

Author information

Correspondence to Neil Foster-McGregor.

Appendix

Appendix

Tables 13, 14, 15 and 16.

Table 13 Industries and industry classification
Table 14 Average cost shares
Table 15 Offshoring elasticities when splitting the data by development levels
Table 16 Offshoring elasticities from the instrumental variables estimation

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Foster-McGregor, N., Stehrer, R. & de Vries, G.J. Offshoring and the skill structure of labour demand. Rev World Econ 149, 631–662 (2013). https://doi.org/10.1007/s10290-013-0163-4

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Keywords

  • Offshoring
  • Trade
  • Wages
  • Labour demand

JEL Classification

  • F14
  • J31