The Impact of Offshoring on Employment Essay Example

The Impact of Offshoring on Employment Essay Example The Impact of Offshoring on Employment Essay The Impact of Offshoring on Employment Essay The Impact of Offshoring on Employment BY jamtebl 2354 What is the impact of offshoring on employment (in the offshoring country)? Use empirical evidence to support your answer. The development of globalisation of recent years has seen the ever increasing frequency and extent of offshoring by Multi National Enterprises (MNEs), involving the contracting out of different stages of production that were previously performed within a production unit to foreign subcontractors (Foster 2012). Reductions in the cost of international trade created and outpouring of low skill, labour-intensive anufacturing to developing countries. Factors such as the removal of trade barriers, reduction transport costs, and advances communication technology have made it possible to divide production into component stages, locate these production stages Brainard and Ricker (1997). Becker et al (2012) note that there is considerable agreement among economists that fragmentation of production, and offshoring production stages, is likely to affect the employment and wages across countries. There is however disagreements over the expected direction of these effects. Offshoring mainly involves tasks carried out by ow skilled labour, as such, the relative demand for low skilled labour would decline and contribute to a widening wage gap between skilled and unskilled labour. The central argument of this essay, is that despite standard, zero-sum claim (Brainard and Ricker 1997) that multinationals are exporting US (or other industrialised countries) Jobs to low-wage countries, the impact of offshoring is relatively limited, and MNE that engage in extensive offshoring actually increase their levels of relative demand for skilled workers in the onshore country (Feenstra and Hanson 1995). The effect of offshoring on overall employment shifts is analysed by Becker et al (2012) who found that MNEs with employment growth abroad also expanded Jobs at home, whereas ones those that shrink abroad also cuts Jobs at home. Their Study of German MNEs between 1998 and 2001 substantiate their claim: Over the time period, overall employment in Germany increased by 4. 3% on average across all sectors, whereas in MNEs employment increased by 11% over the same period. The highest rates of employment growth was seen in MNEs who were expanding their offshore employment (OE), who experienced 19. growth, whereas MNEs who were contracting the OE saw a shrinkage rate of 6. 1%. Their findings are consistent with two competing explanations as to the increase of onshore employment in firms expanding their OE: Firstly MNEs with favourable factor-market access shocks abroad and resulting foreign expansions may gain competitiveness in global product markets, allowing them to expand also at their home locations. Secondly, MNEs might suffer global product market shocks and in response change employment in the same direction at all their locations. Evidence suggests that each xplanation accounts for roughly half of the observed changes in employment in On the other hand, Macmillian and Harrison (2009) observed that over the period 1982 to 1999 onshore employment of US multinationals shrank by almost 4 million jobs. During this time, the number of workers hired by affiliates in developing countries increased and wages paid to these workers declined. Brainard and Ricker (1997) had similar findings; that whilst US based MNE employment grew by 11% overall between 83 and 92, onshore employment actually decreased by 12. 5% within the US. However, at the time of publishing only a third of all US multinationals had any productive actives in developing countries and for those firms that had OE in developing countries, onshore employment actually increased 13%. This increase was seen in skill-intensive areas, whereas the increase in OE was labour-intensive. These facts are consistent with the hypothesis that US MNEs are exporting low-wage jobs to low-income countries. Macmillian and Harrison (2009) do whoever, further suggest that other factors such as import competition and falling investment goods rices were central to the falling levels of US employment. Their findings suggest that the on the links between offshoring and onshore employment is varied, and that the effect depends on both the type and the location of foreign investment. HiJzen and Swaim (2007) note that even if offshoring doe not typically result in net employment losses at the level of the industry or even the firm as already suggested, this does not necessarily mean that workers do not encounter significant adjustment difficulties. A study by the OECD (2007) demonstrates that intra-industry offshoring is onnected toa demand for high skill levels. HiJzen and Swain (2007) state that this suggests that some of the workers whose Jobs are lost due to the technology effect from offshoring may lack the qualifications required by the Jobs created by the scale effect. (The scale effect being what happens to firms inputs, as the firm expands production). A study by Straus-Kahn (2002) analyses changes in the skill composition of sectorial employment associated with offshoring. Her main results correlate with those previously analysed; international outsourcing has had a strong negative impact on he demand for unskilled labour in the France. The regression analysis she undertook indicates that offshoring has contributed considerably to the observed decline in the within-industry share of unskilled workers in France. It accounts for 25% of the inter-industry shift away from unskilled workers and towards skilled worked between 1985. She does however acknowledge most of increase in the gap between skilled and unskilled labour is due to other factors, other than offshoring, such as skill-based technological progress, through increased R. HiJzen et al (2005) lso highlight the role of R as an explanation to the increase in the skills gap appears as increases international outsourcing and technological change can be induced through R. Another area that warrants analysis is the effect of offshoring has on the labour force developed in the USA over the period 1979-1990. He shows that relative wage and relative employment of high-skilled workers has increase. This positive correlation of relative employment and wages suggests that a shift of the demand curve for high- skilled labour has taken place resulting in a shift along the supply curve, as depicted. This pattern was subsequently found for other countries also (Foster 2012). Figure 1: Plot of Relative Wages against Relative Employment in the USA (1979-1990). Source: Feenstra, R. (2010) Offshoring in the Global Economy: Microeconomic Structure and Macroeconomic Implications. Cambridge: MIT Press. One explanation is attributed to an increase the use of computers and other technological advances, causing a general skill-biased technological change, for shift in demand. Another however, is due to the change in relative demand for labour, which occurred due to the forces of globalisation, and in particular the increase of ffshoring of low skilled Jobs to other countries (Foster 2012). The Stopler Samuelson model states that an increase the relative price of a commodity, raises the return or earnings of the factor used intensively in the production of the commodity (Salvatore 1995). Therefore, in a country with a high degree of skilled labour, an increase in openness, through offshoring, would be expected to increase the returns to skilled labour, further widening the wage gap (Foster 2012). This in turn promotes the view that there tends to be a negative impact f offshoring on the relative wage (defined as the ratio of high-skilled to low-skilled or of non-production to production workers) of unskilled workers. Greenway et al (2008) identified the reduction in wages of low skilled wages, the negative aspect of offshoring (on the I-JK) based on analysis of over 66,000 1-JK. The effect in a drop in wages is negated by the net gains from offshoring due to the increase in levels of employment, which they assess to be worth 100,000 extra Jobs with additional annual turnover of ElObillion in Britain today. These figures, whilst positive for the economy s a whole, are not entirely applicable to evaluating the impact on employment. This essay has demonstrated that the effects that offshoring has on the employment in the offshoring country. The literature surveyed all recognizes the shift in demand, towards high skilled labour, in the onshore country, changing the overall composition of the workforce. The effect on over levels of employment however is negligible, with potentially a small increase. This contravenes the view that offshoring simply exports jobs out of from the onshore country. The degree to which technological changes ave evolved the composition of the work force has played Just as a significant role as the process of offshoring itself, and is perhaps the reason why some studies a produced contradicting results. Overall, I found that a statement by HiJzen and Swaim (2007) perhaps best summarieses the issue: the productivity gains from offshoring are sufficiently large that the Jobs created by higher sales completely offset the Jobs lost by relocating certain production stages to foreign production sites. Becker, S. , Ekholm, K. , and Muendler, M. (2012) Offshoring and the Onshore Composition of Tasks and Skills, Journal of International Economics, Vol . 90, No. 1, pp. 91-106 Brainard, S. , and Ricker, D. (1997) U. S Multinationals and Competition from Low Wage Countries, NBER Working Paper Series, No. 5959 Feenstra, R. and Hanson, G (1995) Foreign direct investment, outsourcing and relative wages NBER working paper No. 5121 Macroeconomic Implications. Cambridge: MIT Press Foster, N. (2012) Offshoring and Labour Markets, 3rd FIE special International Economics Source: http:// www. fiw. ac. at/fileadmin/Documents/Publikationen/Spezial/3. FIW- Special_offshoring 28/4/13] Greenway, D. Gorg, H. , and Kneller, R. (2008) Offshoring and the UK Economy. GEP, Leverhulme Centre for Research on Globalisation and Economic Policy. Source: nottingham. ac. uk/gep/documents/reports/gep-offshoring- report-06-08. pdf [28/4/13] HiJzen, A. , and Swaim , P. (2007) Does Offshoring Reduce Industry Employment? GEP, Leverhulme Centre for Research on Globalisation and Economic Policy. Paper No. 2007/24 HiJzen, A. , Holger, G. , and Hine, R. (2005) International Outsourcing and the Skill Structure of Labour Demand in the United Kingdom, The Economic Journal, Vol. 5, NO. 506, pp. MacMillan, M. , and Harrison, A. (2009) Offshoring Jobs? Multinationals and US Manufacturing Employment Tufts University, Department of Economic, Working paper OECD (2007), OECD Employment outlook, Chapter 3, OECD: pans. Salvatore, D. (1995) International Economics 5th Edition, London: Prentice Hall Straus-Kahn, V (2002) The Role of Globalisation in the Within-Industry Shift Away from Unskilled Workers in France in Baldwin,R and Winters, L. (eds) Challenges to Globalization: Analysing the Economics, Chicago: Chicago University Press