Offshoring trends and their implications
Complaints and opposition to offshoring deals by multinational enterprises (MNEs) have risen in all advanced economies in recent years. Offshoring trends, especially towards lower-wage developing and emerging countries, have been brought under the spotlight as being responsible for the destruction of low-skilled jobs and the progressive deterioration in the economic fortunes of domestic employees at the bottom of the employment ladder. During the 2000s, analyses of newspaper articles on offshoring indicated that references to the subject increased steadily both in the US (e.g. Mankiw and Swagel 2004) and in the UK (e.g. Abramovsky et al. 2004).
Fears about job losses have been traditionally centred on manufacturing. However, recent data show that services – as they become more easily tradeable due to improvements in technology – may be subject to similar trends. Examples of such drifts abound. In 2006, Barclays Bank was the first UK bank to negotiate a framework with the unions over the outsourcing of jobs to low-cost countries. More recently, it was again a media target as a result of moving hundreds of back-office jobs to India. Other firms, such as Adecco (a UK labour recruiting agency) and British Airways, are among a growing number of British companies that have opened offices and/or call centres in developing economies, often facing the wrath of public opinion.
The implications associated to offshoring trends, especially with respect to their labour market impact in the home economy of the multinational enterprise, have also become a popular topic in the academic debate. However, most of the existing evidence has pointed to an overall modest impact of offshoring (e.g. Grossman and Rossi-Hansberg 2006, Robert-Nicoud 2008, Amiti and Wei 2009, Barba Navaretti et al. 2010). Countries relocating low value-added, routine activities abroad and retaining higher value-added activities at home are expected to gain from the rationalisation of their value chain, as job losses in routine occupations may be more than offset by new jobs in non-routine occupations.
Offshoring trends in Great Britain: New evidence
Our work rests on the assumption that the distribution of benefits and costs across geographical segments of the labour market and occupation typologies in the UK is shaped by changes in the industry composition of offshoring. Differences in the industry mix of local labour markets mean sectors vary in their exposure to international relocation of production activities in both manufacturing and service industries. The spatial implications associated to offshoring trends are of primary importance, since the same forces that are likely to spur international convergence – i.e. globalisation of production – may also seemingly prompt subnational polarisation and divergence.
Figure 1. Routine and non-routine jobs in Great Britain, 1999-2008
Our research has analysed the impact of offshoring trends by uncovering their spatial implications, a factor which was generally overlooked in previous analyses. The UK represents a particularly interesting case for analysing how offshoring alters job composition.
- First, the country has undergone progressive job polarisation (Goos and Manning 2007), with labour market disadvantages increasingly concentrated in specific occupational categories.
Routine occupations have declined rapidly over the past decades, whereas there has been a slight increase in the number of non-routine jobs (Figure 1).
- Second, labour market disadvantages were geographically concentrated even prior to the offshoring surge in the 2000s, with a strong spatial clustering at the extreme of the occupational distribution (Figures 2 and 3).
Data from just before the turn of the millennium show that routine occupations were overrepresented in some parts of the UK, mainly in the midlands, the north and the northwest, Wales, and parts of Scotland. By contrast, non-routine activities were overwhelming concentrated in London and the southeast, with spikes in cities such as Aberdeen, Edinburgh, Harrogate, Manchester, and Bristol.
- Third, the UK also experienced sizeable offshoring especially towards developing and emerging countries (Figure 4), with a growing percentage of outward flows occurring in the service sectors (e.g. Abramovsky et al. 2004, Hijzen et al. 2005, Sako 2006).
Figure 2. Spatial distribution of routine jobs across local labour markets (TTWAs) in the UK, 1999
Figure 3. Spatial distribution of non-routine jobs across local labour markets (TTWAs) in in the UK, 1999
Figure 4. Outward investments abroad from the UK, 1998-2008
Offshoring trends between 1998 and 2007 had important distributional consequences at both the spatial and individual level. The impact of offshoring in places more exposed to such trends as a consequence of their pre-existing industry specialisation was significantly negative on routine occupations. Whereas job destruction of routine occupations took place regardless of whether the offshoring was directed towards developed or developing/emerging economies, job creation in non-routine occupations only happened when investment abroad targeted the latter. In addition, compensation effects of job creation in non-routine occupations were strengthened in the long term, once efficiency gains linked to the geographical rationalisation of production had been capitalised.
The results of our study have significant implications. Although efficiency gains coming from the geographical fragmentation of production activities may emerge, particularly over time, automatic compensation mechanisms acting through the increase in the demand of domestic skill intensity may not necessarily be able to eliminate the costs in the home economy. Specialisation following offshoring has in fact been mainly ‘functional’ within industry, rather than across the industry mix (e.g. Robert-Nicoud 2008, Crinò 2009). This implies that adjustments in industry structures within each local labour market may be rather slow.
- Therefore, the consequences of offshoring are likely to be particularly severe in the short and medium term in specific areas with a high initial specialisation in routine activities.
The extent to which such processes generate and reinforce hot spots of job market disadvantages for specific typologies of workers and in locations more exposed to offshoring trends has relevant distributional consequences.
The overall impact of offshoring thus poses important challenges to policy design and implementation. Initiatives targeting the mitigation of the negative consequences of offshoring are deemed necessary in regions characterised by greater risk of exposure to the relocation of production, and in these areas to specific categories of workers. Examples of these initiatives are income support schemes for specific vulnerable groups, coupled with both effective industrial policy interventions to reconvert and revitalise old industrial areas towards higher value added activities, and new approaches to training and skill upgrading programmes.
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Amiti, M and S J Wei (2009), “Service offshoring and productivity: Evidence from the US”, The World Economy, 32(2), 203-220.
Barba Navaretti G, D Castellani, and A Disder (2010), “How does investing in cheap labour countries affect performance at home? Firm-level evidence from France and Italy”, Oxford Economic Papers, 62, 2, 234-260.
Crinò, R (2009), “Offshoring, multinationals and labour market: a review of the empirical literature”, Journal of Economic Surveys, 23(2), 197-249.
Goos, M and A Manning (2007), “Lousy and lovely jobs: The rising polarization of work in Britain”, Review of Economics and Statistics, 89(1), 118-133.
Grossman, G M and E Rossi-Hansberg (2006), “Trading tasks: A simple theory of offshoring”, NBER, WP 12721.
Hijzen A, H Gorg, and R C Hine (2005), “International outsourcing and the skill structure of labour demand in the United Kingdom”, The Economic Journal, 115(506), 860–878.
Mankiw, N G and P Swagel (2006), “The politics and economics of offshore outsourcing”, Journal of Monetary Economics, 53(5), 1027-1056.
Robert-Nicoud, F (2008), “Offshoring of routine tasks and (de) industrialisation: Threat or opportunity—And for whom?” Journal of Urban Economics, 63(2), 517-535.
Sako, M (2006), “Outsourcing and offshoring: implications for productivity of business services”, Oxford Review of Economic Policy, 22(4), 499-512.