Who are the winners and losers from outsourcing?

Holger Görg, Ingo Geishecker, Mon, 09/24/2007

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International outsourcing is a growing phenomenon in world trade, and its 30% approximate increase between 1970 and 1990 has sparked a lot of interest in recent academic literature and the business press. CEPR DP6484 adds to previous studies on outsourcing’s implications for labour markets by investigating its effect, measured in terms of imports of intermediates, on wages for different skill groups. To the best of the authors’ knowledge, this is the first paper to look at the issue by using individual data rather than macro-level data, which makes it possible to control for compositional change of the workforce and to identify winners and losers among workers with different skills in absolute terms. The results show there is not only a marked impact on wages, but there is also evidence of a negative effect of outsourcing on the real wage for low-skilled workers in particular.

The empirical analysis uses data from the large German Socio-Economic Panel Study combined with industry level data for the period 1991 to 2000. Germany is an interesting case to analyze, as there is a general consensus that relative wages of high- vs. low-skilled workers have remained virtually unchanged since the 1980s, even though outsourcing of activities increased substantially during the 1990s. Against the background of nearly constant relative wages on aggregate, the authors find from the micro-level data that international outsourcing has, nevertheless, had a marked impact on wages. Distinguishing three skill categories, there is evidence that outsourcing reduced the real wages for workers in the lowest skill categories; with the results being similar when applying a skill grouping that is based on either required on-the-job skills or educational attainment. Furthermore, high-skilled workers gain from outsourcing in terms of receiving higher wages.

Overall, a one percentage point increase in outsourcing reduced the wage for workers in the lowest skill categories by up to 1.5% while it increased wages for high-skilled workers by up to 2.6%. This suggests that low-skilled workers are losers from this form of globalization of production, while high-skilled workers are, on average, the group that may be able to gain. The results of DP6484 will have implications for policy-makers, who need to debate whether losers should be compensated or in any other way be the focus of policies aimed at easing the adjustment cost of globalization.

DP6484 Winners and losers: A Micro-level Analysis of International Outsourcing and Wages

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URL:  http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=6484.asp

Topics:  International trade

Tags:  wages, offshoring, skills, international outsourcing

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