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Offshoring and labor markets
Vienna University of Economics and Business
30 November 2016
Julia Wörz
Head of Unit
Foreign Research Division
Oesterreichische Nationalbank
Opinions expressed here do not necessarily reflect the official viewpoint of the
Oesterreichische Nationalbank or of the Eurosystem.
www.oenb.at
www.oenb.at [email protected] 2 -
Outline
• Offshoring: driving factors & stylized facts
• Theory
• Empirics
• Policy
• Conclusions
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Offshoring
= relocation of productions stages abroad
Driven by:
Seminal decline in trade costs
ICT revolution Integration of EMEs in global economy
0
5,000
10,000
15,000
20,000
25,000
30,000
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Trade in goods Trade in services FDI flows
International trade and FDI, 1995-2014
billion USD
Source: UNCTAD.
-6
-4
-2
0
2
4
6
8
10
1993-2002 2004 2006 2008 2010 2012
Advanced economies
Emerging and developing economies
Trade growth by regions, 1993-2013
real year-on-year growth in %
Source: WTO.
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Geographic representation of a global value chain
Final consumption
3
7
5
6
2
Final assembly
1
4
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1
23
4
5
6
7
Value added
in the country
of final
assembly
Value added
by first tier
suppliers
Value added
by second
tier
suppliers
Trade in inputs
(first tier
suppliers)
Trade in inputs
(second tier
suppliers)
Trade in value-added:
decomposition of gross
exports
Length of the value chain:
number of production stages1
2
3
4
5
6
7
Distance to final demand:
position of a country in the
value chain
2
F
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Position within GVC influences labour market effects
20
30
40
50
60
70
80
10 15 20 25 30 35 40 45 50 55 60
Index for participation in global value chains, 2011
Backward participation measure
Source: TiVA-OECD.
Forward participation measure
RU NO
Emergingeconomies Advanced economies
HU
LU
US
SKCZ
FI
HR
IE
CA
DE
LTRO
TR
LV
PLEE SI
BG
CN
AT
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What does classical trade theory tell us?
• Free trade increases overall welfare (strong and well established
result) and creates winners and losers (more attention recently).
• Factor price equalization theorem: As goods prices reach new global
equilibrium, factor prices adjust internationally.
• Stolper-Samuelson theorem: If the relative price of a good increases,
then the factor used more intensively in its production gains relatively.
Trade liberalization thus makes the locally scarce factor lose in relative
terms = capital in developing and labor in developed countries.
• Strong enlargement of the global pool of labor via EME‘s trade
integration lowers the capital-labour ratio, hence wages decline
relative to profits and the capital share in global income rises.
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Effects of offshoring on manufacturing employment
Source: Francois and Wörz. 2008. “Producer Services, Manufacturing and Trade”, Journal of
Industry, Competition and Trade (8), pp. 199-229.
imports of business services 0.1398 *** -0.1423 0.014
imports of communication 0.0233 0.1357 0.0324
imports of financial services 0.0064 0.1522 -0.0371
imports of insurance services -0.0804 -0.2313 ** -0.0177
value added productivity 0.0795 -0.1718 -0.0152
total FDI inflows -0.0042 -0.0319 -0.0011
barriers to entrepreneurship 0.0342 -0.0565 0.0094
state control -0.04 * 0.1121 0.0264
barriers to trade and investment 0.0192 0.0689 -0.0075
constant -3.3584 *** -2.6738 *** -3.266 ***
Industry Group
tech intensive labour intensive resource
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Is Europe loosing jobs in manufacturing?
Change in number of workers in the EU27 involved in manufactures GVCs
between 1995 and 2008 (in millions)
Source: Timmer, M., Los, B., Stehrer, R., and de Vries, G. “Rethinking competitiveness: The global
value chain revolution”, VoxEU blog, 26 June 2013. Available:
http://www.voxeu.org/article/rethinking-competitiveness-global-value-chain-revolution
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Did we see a downward pressure on wages from EU
Eastern enlargement?
• Polgar and Wörz (2010) find that more industries in the EU showed a
positive direct impact from trade on wages than a negative one
between 1995-2007.
• Clearly, industries with fast export growth reacted more strongly to
trade.
• In the acceding EU-10 countries, trade more often promoted the
realignment of wages with productivity developments, while in the
incumbent EU-15 countries foreign wages influence wages more
strongly.
Source: Polgar and Wörz. 2010. “No risk and some fun? Trade and wages in the enlarged
European Union”, Empirica (37/2), pp. 127-163.
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ILO estimates of GVC-related job growth
GVC jobs grow faster than overall employment, especially “servicification
jobs” (= GVC-related service jobs depending on manufacturing demand)
Source: Kizu, Kühn and Viegelahn. 2016. “Linking jobs in global supply chains to demand”, ILO
Research Paper No. 16, August 2016, International Labour Office.
Servicification jobs in comparison with other types of jobs
(Index: 1995=1), 1995–2011
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More results from recent ILO study
Sector‘s GVC participation shows positive impact on labour productivity
(especially when final demand comes from advanced economies), but not
on wages.
GVC participation leads to a decline in the wage share in total income.
EU sustains majority of GVC-related jobs in the sample.
Most GVC-jobs are located in EMEs and depend on demand from AEs.
Demand from AEs for GVC-jobs declining, while demand from EMEs is
increasing.
Source: Kizu, Kühn and Viegelahn. 2016. “Linking jobs in global supply chains to demand”, ILO
Research Paper No. 16, August 2016, International Labour Office.
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Conclusions
Offshoring affects employment, offshored jobs unlikely to return home.
Offshoring affects wages (not necessarily negatively, positive
productivity effects).
Offshoring diminishes the wage share in total income.
As long as losers are not compensated well, offshoring undermines
the support for free trade despite positive overall welfare effects.
Technological progress / digitalization poses an equally strong
challenge to the labor market.
Many vocal white-collar professionals will soon be among the
losers, they were not used to foreign competition so far.
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Possible policy responses
Improving the safety net (pension portability, wage-loss insurance, …)
Preparing the workforce for the future (not necessarily more, but
better and more adequate education/training, non-routine jobs,
vocational education)
Climbing the comparative advantage ladder (constant innovation)
Redistributing the gains from trade / offshoring more equally (i.e.
through higher taxes on profits)
