Academic Literature

US – Offshoring and middle-income workers

New evidence on the relationship between offshoring and polarisation

In a new working paper, Lindsay Oldenski documents an empirical link between offshoring and the polarisation of the US labour market (Oldenski 2012). This study, which will be presented in November at both the Empirical Investigations in International Trade conference in Santa Cruz and the US Department of Labor Centennial Celebration in Washington DC, uses detailed data on offshoring from the US Bureau of Economic Analysis paired with occupational wage data from the Bureau of Labor Statistics and occupational task data from the Department of Labor’s Occupational Information Network. The results show that when the share of offshoring increases in a given industry, there is a significant increase in the gap between wages earned by workers in the highest-paid occupations relative to workers in the median-wage occupation in that industry. At the same time, the gap narrows between wages earned by the lowest-paid workers and workers in the middle of the distribution.

The relationship between offshoring and polarisation is driven by two important forces. The first, which has been mentioned in earlier work on polarisation, is the relative ease with which different types of occupational tasks can be fragmented across borders. The second, which has been neglected in the labour literature, is comparative advantage.

First, fragmenting the production process in a way that moves certain intermediate inputs or processes to another country is easier for some types of tasks than for others. For example, activities that involve direct interaction with consumers, such as haircuts or food service, are extremely difficult to offshore while those that are not location specific, such as data entry, can be performed anywhere. In addition, firms are more likely to offshore routine tasks and keep non-routine tasks in their headquarters. Routine tasks can easily be broken down into a clear set of steps, which can then be communicated to someone located in another country. Non-routine tasks involve decision making, problem solving, or creativity. These non-routine tasks are both more difficult to communicate to overseas contractors or foreign affiliates and more crucial to a firm’s core mission or strategy, and thus they are more likely to be performed in a company’s US headquarters rather than offshored.

Yet focusing on the ease with which a given task can be traded does not tell the whole story. Many extremely high-skilled tasks, such as engineering and research, are becoming increasingly tradable as well. Yet US workers in professions that require these tasks have seen their wages rise. Interactions between offshorability (or, more accurately, tradeabilty) and comparative advantage can explain both the overall widening of the wage gap in the US, as well as disproportionate gains for workers at the top of the skill distribution and disproportionate relative losses for workers in the middle of the distribution. Non-routine and communication intensive occupations are concentrated at both the top and the bottom of the skill distribution in the US. However, US workers at the top of the distribution also perform the jobs in which the US has comparative advantage. Thus we should expect these high-skilled, high-wage workers to gain the most from the increased tradeability of certain tasks both because the areas they specialise in are activities that are more in demand in the US as trade expands and because they are made more productive by the availability of cheaper complementary low-skilled tasks through offshoring. Middle-skilled workers gain the least, as they are not in occupations for which the US has comparative advantage and are also more likely to perform routine, easily offshorable tasks. Workers at the bottom of the distribution are not in sectors in which the US has comparative advantage, yet many of the tasks they perform are either non-routine manual or location specific and thus less vulnerable to offshoring than middle-skill jobs…

via Offshoring and middle-income workers in the US | vox.

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