How Offshoring Can Affect the Industries’ Skill Composition

1 Introduction

Within the last decades offshoring became an important issue in economic research
and moved into the focus of political and public discussion as well. The process of
slicing up the value chain, relocating the production of specific fragments abroad and
importing the respective intermediates instead is assumed to significantly affect the
domestic labor market.¹ In this respect, a huge amount of theoretical and empirical
literature emerged, especially focusing on the implications on relative wages.

Feenstra and Hanson (1996a,b, 1999) e.g. contributed very early by examining off-
shoring effects on relative high skill wages. Assuming a relative high skill abundant
economy that relocates its relative low skill intensive parts of production abroad, the-
oretical as well as empirical results for the US-Mexican case show that, following the
decreasing pressure on relative low skill labor demand, a significant effect on relative
high skill wages occurs: Since the relocated fragment is assumed to be relative low skill
intensive for the offshoring, but relative high skill intensive for the inshoring economy,
relative high skill wages significantly increase in both of them. This result is mean-
while known as the “factor bias” of offshoring. Since Feenstra and Hanson assume
only one industry, Arndt (1997, 1998b,a) extended the Feenstra and Hanson model,
distinguishing between a relative low and a relative high skill intensive industry. Thus,
Arndt moved the focus towards more disaggregated industry levels. With the so called
“sector bias” of offshoring, Arndt showed that the effects on relative wages depend
crucially on the skill intensity of the industry where offshoring takes place. If the
relative low skill intensive industry relocates parts of the production process abroad,
relative low skill wages increase, whereas relative high skill wages increase if offshoring
takes place in the relative high skill intensive industry. Similar as the process of skill
biased technological change, the effects are initiated by a reduction of unit costs and an
enabled wage markup that, depending on the respective industry, either flows to low
or high skilled labor. The discussion of the factor and the sector bias of offshoring, as
well as the respective wage effects, can be followed in a huge amount of theoretical and
empirical contributions, as e.g. Berman et al. (1994), Egger and Egger (2002), Egger and
Falkinger (2003), Geishecker and Gorg (2005), Hijzen (2007), Horgos (2009b), or Kohler
(2009).

Inspired by these well known implications of offshoring, most of the following liter-
ature kept the focus on the effects on relative wages. However, these effects are by no
means the whole story. In general equilibrium - and even within the labor market - there
exist several other important implications. One of these issues is the effect of offshoring

¹In this contribution, offshoring is used as in most recent publications, combining the imports of
intermediates produced in foreign affiliates (FDI) and the imports of intermediates produced at
arms’ length (international outsourcing).

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