Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at Offshoring and the Skill Structure of Labour Demand 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 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. 1
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 2
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 3
Offshoring and Labour Markets Production offshoring has lead to the fear in developed countries especially that outsourcing 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 4
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 5
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 6
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) 7
Elasticities The elasticity of factor demand for factor j with respect to a change in factor prices will be given by: where if The elasticity of factor demand with respect to a change in the capital stock, output, and domestic and imported intermediates will be given by: 8
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 9 - O Imported intermediate purchases - V Value-added Analogous measures are constructed for domestic intermediate use
Narrow Offshoring 0.45 0.4 0.35 0.3 0.25 0.2 Change between 1995 and 2007 1995 0.15 0.1 0.05 0 aus aut bel cze deu dnk esp fin fra gbr hun irl ita jpn nld svn swe usa -0.05 10
Broad Offshoring 0.7 0.6 0.5 0.4 0.3 Change between 1995 and 2007 1995 0.2 0.1 0 aus aut bel cze deu dnk esp fin fra gbr hun irl ita jpn nld svn swe usa 11
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 12
Regression Results for Narrow Offshoring 1 VARIABLES (1) (2) (3) 13 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
Regression Results for Narrow Offshoring 2 VARIABLES (1) (2) (3) 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) 14
Results for Narrow Offshoring - Elasticities VARIABLES (1) (2) (3) 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 15
Regression Results Including Broad Offshoring 1 VARIABLES (1) (2) (3) 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 16
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) 17
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 18
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) ln L = α0 ict + α j ln wict + βk ln kict + β y ln yict + j - Unconditional labour demand equation (for total effect) ln L = α0 + ict α j ln wict + βk ln kict + β p ln pict + j l l l γ z γ z ilct l ilct - Scale effect is difference between total and productivity effect 19
Offshoring and employment levels Conditional Unconditional All All Wage/Materials Price -0.137*** -0.0834*** 20 (0.00886) (0.00937) Log Capital Stock 0.550*** 0.669*** Log Output 0.184*** (0.0112) (0.0133) (0.0137) 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
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 21
Summary 22 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
Industry groups - manufacturing 23
Industry groups - services 24