How Offshoring Can Affect the Industries’ Skill Composition



patterns if offshoring takes place in different industries.

(iii) Following the framework of the sector bias of offshoring, increasing high skill
ratios would be expected if offshoring takes place in relative low skill intensive
industries and vice versa for relative high skill intensive ones.

Data

The empirical analysis bases on data for the German economy from 1991 - 2000. To
measure offshoring activities on the two digit NACE industry level, we use input-
output tables provided by the German Federal Statistical Office. Since offshoring can
not be directly observed at the industry level, there is the need for adequate proxies.
Therefore, literature developed several indices with some of them quite common in
use.6 In this paper we use one of these indices called Vertical Specialization (VS). The
VS-index is introduced in Campa and Goldberg (1997), Feenstra (1998), and Strauss-
Kahn (2003) and can be calculated using

nz

VSt=Xj=1Xw=1


wt qwjt
Pjt


nz

Xj=1 Xw=1


(mwt /swt) qwjt
Pjt


(1)


with qwjt as industry j’s total inputs of good w (domestic as well as from abroad)
in year
t, p as the level of production and f as a ratio estimating the international
fraction of the inputs. The international estimation ratio
f relates imported goods m
to domestically used goods s. The goodness of the VS index depends strongly on
the international estimation ratio
f . As shown in Horgos (2009b), the VS index has
quite good properties proxying offshoring activities, especially on more disaggregated
industry levels.

The information of the input-output tables are also used to obtain the industries’
output (
Qjt). We enrich the information of the Federal Statistical Office with the Ger-
man Socio Economic Panel (GSOEP) provided in yearly waves since 1984 by the DIW
Berlin.7 The GSOEP observes gross wages from around 40,000 individuals, including
additional payments like e.g. 13th or 14th month pay or Christmas bonuses. Individu-
als in the GSOEP are additionally classified with respect to the International Standard
Classification of Education, provided by UNESCO (1997). Thus, using the informa-
tion on the level of education, we calculate the industries’ mean wages of high skilled
labor (
wjH) as well as their low skill intensive counterparts (wjL).8 In order to obtain

6For a comparative analysis of different offshoring indices, their design, quality, and econometrical
behavior when investigating labor market effects see Horgos (2009b).

7For detailed information on the German Socie Economic Panel see Haisken-DeNew and Frick (2005).

8According to the ISCED, low skilled workers are defined as workers with primary (1), lower secondary
or second stage of basic education (2), whereas high skilled individuals are assumed to have some



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