Fragmentation: Productivity, Employment, and Wages

Fragmentation

Fragmentation: Analytical Issues

Fragmentation: Foreign Direct Investment

Fragmentation: Multinational Companies

Fragmentation: Regional Integration

Fragmentation: Fragmentation and Interdependence

The spread of fragmentation has sounded political alarm bells in advanced countries about jobs and wages not only in manufacturing, but in services industries, as ‘‘offshoring’’ of call centers, help desks, programming, and ticketing operations has proliferated. There is no doubt that jobs of workers whose functions are shifted to foreign locations are lost. But if cross-border sourcing of components raises competitiveness and lowers prices of final products or services, thereby increasing sales and thus output, then jobs will be created elsewhere in the industry or more generally in the economy.

With respect to wages, there are two concerns. First, production sharing with low-wage countries may exert downward pressure not only on the wages ofworkerswhose jobs are lost, but onwages generally in a ‘‘race to the bottom.’’ Second, itmay change the wage distribution against low-skilled workers and widen the wage gap between skilled and unskilled workers.

The available evidence is mixed, in part because it is not easy to separate the effects of fragmentation from those of technological change and of other factors affecting employment and wages (Feenstra 1998).The outcome further depends on the sector in which fragmentation occurs, on the skill ratios in the affected industries, and on the relationship of each skill category to capital. In a framework in which fragmentation occurs in many industries, moreover, there will be ‘‘onshoring’’ as well as ‘‘offshoring,’’ so that jobs lost in one sector must be balanced against jobs gained in others.Under such circumstances, the problem is mainly one of matching unemployed workers with emerging jobs. This is the familiar trade-adjustment problem.