How Offshoring Can Affect the Industries’ Skill Composition



As the results show for the more aggregated levels of the whole economy and the
manufacturing sector (Columns 1 and 2),11 effects are overall quite insignificant. As
expected, if relative wages of the high skilled increase, industries exhibit a tendency to
decrease the high skill labor ratio, as low skilled are substituted for the more expensive
high skilled (what is part of the “wage effect”, mentioned in the theoretical section
above). The effects, however, are not at a statistical significant level. The industries’
output show an increasing effect on the skill ratio, but also not at a common level of
statistical significance. Concerning the offshoring index VS, the insignificant results
confirm hypothesis (i). There is an increasing tendency of the high skilled labor ratio,
however, the effect is not statistically significant in the aggregate, neither in the whole
economy, nor in the manufacturing sector as a whole.

Interesting results occur when moving the analysis towards more disaggregated lev-
els of industry aggregation (Column 3 and 4). First, consider Column 3. We replace the
aggregated VS index by two variables interacting the VS index with dummy variables
set one for either the relative low or the relative high skill intensive industries (both as
subsamples of the manufacturing sector only). Therefore, i VS (Y) proxies offshoring
taking place in the relative low skill intensive Y industry and i VS (X) offshoring in
the relative high skill intensive X industry. The results support hypothesis (ii): The
implications of offshoring on the industries skill ratio strongly depend on the industries
where offshoring takes place. If it takes place in relative low skill intensive industries,
the high skill labor ratio shows a decreasing tendency, even when not reaching a com-
mon level of statistical significance. By contrast, if offshoring takes place in the relative
high skill intensive industries the industries’ high skill labor ratio increases, statisti-
cally significant at the 1 percent level. This result goes in hand with the pattern shown
in other empirical investigations (see e.g. Falzoni and Tajoli (2010) for results on the
Italian economy), however, contradicts with the pattern expected from the theoretical
literature. As we discussed above and summarized in hypothesis (iii) the high skill
labor ratio should increases if offshoring takes place in the relative low skill intensive
industries and decrease in the relative high skill intensive ones. The empirical results
here support exactly the opposite (what will be discussed in detail in the next section).

In order to move to a higher level of disaggregation, Column 4 extends the analysis
by further distinguishing the offshoring activities of the two industry samples. i VS (Y
L) proxies offshoring of the low skill intensive production parts (L) in the low skill
intensive industry (Y), whereas i VS (Y
H) proxies offshoring activities of the high skill
intensive fragments. For the high skill intensive X industries we continue this notation
and get i VS (X
L) as well as i VS (X H). Again, we achieve a significantly increasing
effect in the high skill intensive industries and a partly significantly decreasing effect
in the low skill intensive ones. The interesting point to mention here is that the

11Sincethe examination here focus on material offshoring, we exclude the service sector in all regressions.

13



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