Integrated sectors - diversified earnings: the (missing) impact of offshoring on wages and wage convergence in the EU27

Abstract

This paper assesses the impact of international outsourcing/offshoring practices on the process of wage equalization across manufacturing sectors in a sample of EU27 economies (1995–2009). We discriminate between heterogeneous wage effects on different skill categories of workers (low, medium and high skill). The main focus is on the labour market outcomes of vertical integration, so we augment a model of conditional wage convergence through the inclusion of sector-specific broad and narrow outsourcing/offshoring indices based on input-output data (World Input Output Database, April 2012 release). Two-way relations between trade and wages are addressed through the use of a gravity-based sector-level instrument. We find no evidence supporting unconditional skill-specific wage convergence in EU sectors. In a conditional setting, (slow) wage convergence takes place, but international outsourcing plays a negligible role in wage equalization. Moreover, even though regression results indicate that offshoring reduces the wage growth of domestic medium- and low-skilled workers, we show that this negative effect is economically small.

References

  1. Acemoglu, D., Autor, D.H.: Skills, Tasks and technologies: implications for employment and earnings. In: Ashenfelter, O., Card, D.E. (eds.): Handbook of Labor Economics, vol. 4. Elsevier, Amsterdam (2011)

  2. Acemoglu, D., Gancia, G., Zilibotti, F.: Offshoring and directed technical change. NBER Working Paper No. 18595. National Bureau of Economic Research (2012)

  3. Amiti, M., Wei, S.J.: Does service offshoring lead to job losses? Evidence from the United States. In: International Trade in Services and Intangibles in the Era of Globalization, pp 227–243. University of Chicago Press (2009)

  4. Andersen, T.M., Haldrup, N., Sørensen, J.R: Labour market implications of EU product market integration. Econ. Policy 15(30), 105–134 (2000)

    Article  Google Scholar 

  5. Arellano, M., Bond, S.R.: Some tests of specification for panel data: monte carlo evidence and an application to employment equations. Rev. Econ. Studies 58(2), 277–297 (1991)

    Article  Google Scholar 

  6. Baldone, S., Sdogati, F., Tajoli, L.: Patterns and determinants of international fragmentation of production: evidence from outward processing trade between the EU and Central Eastern European countries. Weltwirtschaftliches Arch. 137(1), 80–104 (2001)

    Article  Google Scholar 

  7. Baldwin, R., Robert-Nicoud, F.: Trade-in-goods and trade-in-tasks: An integrating framework. J. Int. Econ. 92(1), 51–62 (2014)

    Article  Google Scholar 

  8. Barro, R.J.: Economic growth in a cross section of countries. Q. J. Econ. 106(2), 407–443 (1991)

    Article  Google Scholar 

  9. Barro, R.J.: Convergence and modernization revisited. NBER Working Papers No. 18295. National Bureau of Economic Research (2012)

  10. Barro, R.J., Sala-i-Martin, X.: Convergence. J. Political Econ. 100(2), 223–251 (1992)

    Article  Google Scholar 

  11. Barro, R.J., Sala-i-Martin, X.: Economic Growth. The MIT Press, Cambridge (MA) (2004)

    Google Scholar 

  12. Barro, R.J., Sala-i-Martin, X., Blanchard, O.J., Hall, R.E: Convergence across states and regions. Brook. Pap. Econ. Act. 1, 107–182 (1991)

    Article  Google Scholar 

  13. Bartkowska, M., Riedl, A.: Regional convergence clubs in Europe: Identification and conditioning factors. Econ. Modell. 29(1), 22–31 (2012)

    Article  Google Scholar 

  14. Baumol, W.J.: Productivity growth, convergence, and welfare: what the long-run data show. Am. Econ. Rev. 76(5), 1072–1085 (1986)

    Google Scholar 

  15. Blundell, R., Bond, S.: Initial conditions and moment restrictions in dynamic panel data models. J. Econ. 87, 115–143 (1998)

    Article  Google Scholar 

  16. Bond, S.: Dynamic panel data models: A guide to micro data methods and practice, Cemmap Working Paper CWP09/02. The Institute for Fiscal Studies, Department of Economics, UCL (2002)

  17. De Long, J.B.: Productivity growth, convergence, and welfare: comment. Am. Econ. Rev. 78(5), 1138–1154 (1988)

    Google Scholar 

  18. Deardorff, A.V.: Fragmentation in simple trade models. N. Am. J. Econ. Finan. 12(2), 121–137 (2001)

    Article  Google Scholar 

  19. Di Giovanni, J., Levchenko, A.A.: Trade openness and volatility. Rev. Econ. Stat. 91(3), 558–585 (2009)

    Article  Google Scholar 

  20. Dietzenbacher, E., Los, B., Stehrer, R., Timmer, M., De Vries, G.: The construction of world input-output tables in the WIOD project. Econ. Syst. Res. 25(1), 71–98 (2013)

    Article  Google Scholar 

  21. Egger, P.: Intermediate goods trade and international wage convergence in Central Europe. Empirica 33(4), 181–192 (2006)

    Article  Google Scholar 

  22. Egger, H., Egger, P.: How international outsourcing drives up Eastern European wages. Weltwirtschaftliches Arch. 138(1), 83–96 (2002)

    Article  Google Scholar 

  23. Egger, P., Pfaffermayr, M.: Two dimensions of convergence: national and international wage adjustment effects of cross-border outsourcing in europe. Rev. Int. Econ. 12(5), 833–843 (2004)

    Article  Google Scholar 

  24. Egger, P., Stehrer, R.: International outsourcing and the skill-specific wage bill in eastern Europe. World Econ. 26(1), 61–72 (2003)

    Article  Google Scholar 

  25. Esposito, P., Stehrer, R.: The sector bias of skill-biased technical change and the rising skill premium in transition economies. Empirica 36(3), 351–364 (2009)

    Article  Google Scholar 

  26. Feenstra, R.C.: Offshoring in the Global Economy: Microeconomic Structure and Marcoeconomic Implications. The MIT Press, Cambridge, MA (2010)

    Google Scholar 

  27. Feenstra, R.C., Hanson, G.H.: Globalization, Outsourcing, and Wage Inequality. Am. Econ. Rev. 86(2), 240–45 (1996)

    Google Scholar 

  28. Feenstra, R.C., Hanson G.H.: The impact of outsourcing and high-technology capital on wages: Estimates for the United States, 1979–1990. Q. J. Econ. 114, 907–941 (1999)

    Article  Google Scholar 

  29. Feenstra, R., Hanson, G.H.: Global production sharing and rising inequality: A survey of trade and wages. NBER Working Paper No. 8372. National Bureau of Economic Research (2001)

  30. Feenstra, R.C., Jensen, J.B.: Evaluating estimates of materials offshoring from US manufacturing. Econ. Lett. 117(1), 170–173 (2012)

    Article  Google Scholar 

  31. Frankel, J.A., Romer, D.: Does trade cause growth? Am. Econ. Rev. 89(3), 379–399 (1999)

    Article  Google Scholar 

  32. Geishecker, I., Görg, H.: Winners and losers: A micro-level analysis of international outsourcing and wages. Can. J. Econ./Revue Canadienne d’Economique 41(1), 243–270 (2008)

    Article  Google Scholar 

  33. Goos, M., Manning, A., Salomons, A.: Job polarization in Europe. Am. Econ. Rev. 99(2), 58–63 (2009)

    Article  Google Scholar 

  34. Grossman, G.M., Rossi-Hansberg, E.: Trading tasks: A simple theory of offshoring. Am. Econ. Rev. 98(5), 1978 (2008)

    Article  Google Scholar 

  35. Grossman, G.M., Rossi-Hansberg, E.: Task trade between similar countries. Econometrica 80(2), 593–629 (2012)

    Article  Google Scholar 

  36. Grossman, G.E.: Heterogenous workers and international trade. Rev. World Econ. 149(2), 211–245 (2013)

    Article  Google Scholar 

  37. Head, K., Mayer, T.: Gravity equations: toolkit, cookbook, workhorse. In: Gopinath, Helpman, and Rogoff (eds.) Handbook of International Economics, vol. 4, pp. 131–195. Elsevier (2015)

  38. Hijzen, A., Swaim, P.: Does offshoring reduce industry employment? Nat. Inst. Econ. Rev. 201(1), 86–96 (2007)

    Article  Google Scholar 

  39. Hummels, D., Jørgensen, R., Munch, J.R., Xiang, C.: The wage effects of offshoring: Evidence from Danish matched worker-firm data. NBER Working Papers No. 17496. National Bureau of Economic Research (2011)

  40. Jones, R.W., Kierzkowski, H.: The role of services in production and international trade: A theoretical framework. In: Jones, R., Krueger, A. (eds.) Basil Blackwell, Oxford (1990)

    Google Scholar 

  41. Jones, R.W., Kierzkowski, H.: Globalization and the consequences of international fragmentation. In: Dornbusch, R., Calvo, G., Obsfeld, M. (eds.) MIT Press, Cambridge, MA (1998)

    Google Scholar 

  42. Kohler, W.: Aspects of international fragmentation. Rev. Int. Econ. 12(5), 793–816 (2004)

    Article  Google Scholar 

  43. Magda, I., Rycx, F., Tojerow, I., Valsamis, D.: Wage differentials across sectors in Europe. Econ. Trans. 19(4), 749–769 (2011)

    Article  Google Scholar 

  44. Marin, D.: A new international division of labor in Europe: Outsourcing and offshoring to Eastern Europe. J. Eur. Econ. Assoc. 4(2–3), 612–622 (2006)

    Article  Google Scholar 

  45. Markusen, J.: Modeling the offshoring of white-collar services: from comparative advantage to the new theories of trade and FDI. NBER Working Papers No. 11827. National Bureau of Economic Research (2005)

  46. Michel, B., Rycx, F.: Does offshoring of materials and business services affect employment? Evidence from a small open economy. Appl. Econ. 44(2), 229–251 (2012)

    Article  Google Scholar 

  47. Michel, B., Rycx, F.: Productivity gains and spillovers from offshoring. Rev. Int. Econ. 22(1), 73–85 (2014)

    Article  Google Scholar 

  48. Mora, T., Lopez-Tamayo, J., Suriñach, J.: Are wages and productivity converging simultaneously in Euro-area countries?. Appl. Econ. 37(17), 2001–2008 (2005)

    Article  Google Scholar 

  49. Onaran, O., Stockhammer, E.: The effect of FDI and foreign trade on wages in the Central and Eastern European Countries in the post-transition era: A sectoral analysis for the manufacturing industry. Struct. Chang. Econ. Dyn. 19(1), 66–80 (2008)

    Article  Google Scholar 

  50. Parteka, A., Wolszczak-Derlacz, J.: The impact of trade integration with the EU on productivity in a post-transition economy. The case of Polish manufacturing sectors. Emerg. Mark. Finance Trade 49(2), 84–104 (2013)

    Article  Google Scholar 

  51. Parteka A., Wolszczak-Derlacz, J.: Integrated sectors - diversified earnings: the (missing) impact of offshoring on wages and wage convergence in the EU27 [revised, full version]. GUT FME Working Paper Series A, No.5/2014(24). Gdansk (Poland): Gdansk University of Technology, Faculty of Management and Economics ftp://ftp.zie.pg.gda.pl/RePEc/gdk/wpaper/WP_GUTFME_A_24_PartekaWolszczakDerlacz.pdf (2014)

  52. Polgár, É., Wörz, J.: No risk and some fun? Trade and wages in the enlarged European Union. Empirica 37(2), 127–163 (2010)

    Article  Google Scholar 

  53. Ramskogler, P.: The State of wage convergence in the European Monetary Union. Department of economics working paper series No. 130. WU Vienna University of Economics and Business, Vienna (2010)

    Google Scholar 

  54. Ramskogler, P.: Is there a European wage leader? Wage spillovers in the European Monetary Union. Camb. J. Econ. 36(4), 941–962 (2012)

    Article  Google Scholar 

  55. Rodrik, D.: The future of economic convergence. NBER Working Paper No. 17400. National Bureau of Economic Research (2011)

  56. Roodman, D.: A Note on the Theme of Too Many Instruments. Oxf. Bull. Econ. Stat. 71, 135–158 (2009)

    Article  Google Scholar 

  57. Santos Silva, M.C., Tenreyro, S.: The log of gravity. Rev. Econ. Stat. 88(4), 641–658 (2006)

    Article  Google Scholar 

  58. Schwörer, T.: Offshoring, domestic outsourcing and productivity: evidence for a number of European countries. Rev. World Econ. 149(1), 131–149 (2013)

    Article  Google Scholar 

  59. Timmer M., Erumban A.A., Gouma R., Los B., Temurshoev U., de Vries G.J., Arto I., Andreoni V., Genty A., Neuwahl F., Rueda-Cantuche J.M., Villanueva A., Francois J., Pindyuk O., Pöschl J., Stehrer R., Estreicher G.: The World Input-Output Database (WIOD): Contents, Sources and Methods. April 2012, Version 0.9. Downloadable at http://www.wiod.org/publications/source_docs/WIOD_sources.pdf (2012)

  60. Tovias, A.: Testing factor price equalization in the EEC. JCMS: J. Common Mark. Stud. 20(4), 375–388 (1982)

    Google Scholar 

  61. Venables, A.J.: Fragmentation and multinational production. Eur. Econ. Rev. 43(4), 935–945 (1999)

    Article  Google Scholar 

  62. Wolszczak-Derlacz, J.: Does one currency mean one price? East. Eur. Econ. 48(2), 87–114 (2010)

    Article  Google Scholar 

  63. Wood, A.: How Trade Hurt Unskilled Workers. J. Econ. Perspect. 9(3), 57–80 (1995)

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Aleksandra Parteka.

Additional information

The research has been conducted within the project financed by the National Science Centre (NCN), Poland (decision number DEC-2013/11/B/HS4/02134). Financial support from NCN is gratefully acknowledged. We also thank two anonymous referees, David Card, as well as the participants to conferences (Max Weber Conference – European University Institute, Warsaw International Economic Meeting, DEGIT, Macromodels) and seminars (Labor Lunch Seminar - University of California, Berkeley; Universita’ Politecnica delle Marche, Ancona; Warsaw School of Economics, Gdansk University of Technology) for useful remarks on an earlier version of this paper. The usual disclaimers apply.

Rights and permissions

Open Access This article is distributed under the terms of the Creative Commons Attribution License which permits any use, distribution, and reproduction in any medium, provided the original author(s) and the source are credited.

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Parteka, A., Wolszczak-Derlacz, J. Integrated sectors - diversified earnings: the (missing) impact of offshoring on wages and wage convergence in the EU27. J Econ Inequal 13, 325–350 (2015). https://doi.org/10.1007/s10888-014-9290-y

Download citation

Keywords

  • Wage
  • Convergence
  • International outsourcing
  • Offshoring
  • Input-output