Outsourcing/offshoring: Outsourcing versus Technological Change
Outsourcing/offshoring: Measures of Outsourcing
Outsourcing/offshoring: Effect of Outsourcing on Wages: Evidence from the 1980s
Outsourcing/offshoring: Trade Costs and Outsourcing across Firms
Outsourcing/offshoring: Regional Variation in Wage Inequality in the United States
Outsourcing/offshoring: Service Outsourcing in Manufacturing: Evidence from the 1990s
Outsourcing/offshoring: Offshoring’s Impact on the Service Sector
By shifting activities from one country to the other, outsourcing can increase the relative demand for skilled labor in both countries, as has actually occurred in a number of industrial and developing countries. However, the same result can occur from skill-biased technological change, such as the increased use of computers, which can increase the relative demand for skilled labor across countries. Given that outsourcing and skill-biased technological change both predict an increase in the relative wage of skilled labor, it becomes an empirical issue as to which is more important.
A study for the United States (Feenstra and Hanson 1999) seeks to explain the increase in the share of total wage payments going to nonproduction (skilled) versus production (unskilled) labor in U.S.manufacturing industries over the period1979 90 and analyzes the increase in the relative wage of nonproduction labor over the same period. The study considers two possible explanations for the change in wages: outsourcing and the use of hightech equipment such as computers.High-technology equipment can itself bemeasured in two ways: either as a fraction of the total capital equipment installed in each industry or as a fraction of new investment in capital that is devoted to computers and other hightech devices.
Using the first measure of high-tech equipment (i.e., fraction of the capital stock), 20 23 percent of the increase in the share of wage payments going to nonproduction workers was explained by outsourcing, and 8 12 percent of the increase was explained by the growing use of high-tech capital. Thus, using the first measure of high-tech equipment, it appears that outsourcingwasmore important than high-tech capital in explaining the change in relative demand for skilled workers. The story is different, however, when the second measure of high-tech equipment (i.e., fraction of newinvestment) is used. In that case, outsourcing explains only 13 percent of the increase in the nonproduction share of wages, whereas hightech investment explains 37 percent of that increase. So we see from these results that both outsourcing and high-tech equipment are important explanations for the increase in the relative wage of skilled labor in the United States, but which one is more important depends on how we measure the high-tech equipment.
Moving on to the increase in the relative wage of nonproduction workers, using the first measure of high-tech equipment (fraction of the capital stock), 21 27 percent of the increase in the relative wage of nonproduction workers was explained by outsourcing, and 29 32 percent of the increase was explained by the growing use of high-tech capital. Using the other measure of high-tech equipment (fraction of new investment), the large spending on high-tech equipment in new investment can explain nearly all (99 percent) of the increase in the relative wage for nonproduction workers, leaving little room for outsourcing to play much of a role (it explains only 12 percent of the increase in the relative wage). These results are lopsided enough that we might be skeptical of using new investment to measure high-tech equipment and therefore prefer the results using the capital stocks. Summing up, both outsourcing and high-tech equipment are important explanations for the increase in the relative wage of nonproduction/ production labor in U.S. manufacturing, but the relative contributions of the two measures are very sensitive to how we measure the high-tech equipment.