easily be extended to generalize the results, that are summarized in Proposition 2.
Proposition 2: The implications of offshoring on the industries’ skill ratio are driven by a
direct “offshoring-effect” as well as an indirect “wage-effect”. If offshoring takes place in the
relative low skill intensive industry, the industries unambiguously shift production towards
more high skilled labor when relocating the relative low skill intensive production block. If the
industry relocates its high skill intensive fragment, results are ambiguous since the wage and
the offshoring-effect work in different directions. If offshoring takes place in the relative high
skill intensive industry, the industries’ unambiguously shift production towards more low skill
intensive processes when relocating the relative high skill intensive fragment. Again, results
are ambiguous if the industry offshores its low skill intensive production process.
As could be shown in this section, theoretical results on the implications of offshoring
on the industries’ skill composition are not as clear cut as e.g. the implications on
relative wages. Results depend on the level of industry aggregation as well as on more
specific characteristics of the offshoring process: on which industry relocates parts of
it‘s production fragments, on the relative skill intensity of the relocated parts, and, from
a more formal point of view, also on the model set-up and its assumptions (as e.g. the
elasticity of substitution) predicting if the wage-effect outperforms the offshoring-effect
or vice versa.5
4 Empirical Evidence for Germany
This section empirically investigates the effects of offshoring on the within industries’
skill ratio for Germany from 1991 - 2000. Before describing the data and presenting the
estimation results, we distill three testable hypothesis from the theoretical examination
above:
(i) On more aggregated industry levels (as e.g. the whole economy or the manufac-
turing sector), different forces are expected to occur that sum up to insignificant
effects of offshoring on the industries skill ratio.
(ii) When conducting the analysis on more disaggregated industry levels, effects
should get significant and, due to industry heterogeneity, illuminate different
5In the above assumed scenario (when the relative low skill intensive industry relocates its relative low
skill intensive part of production), the wage and the offshoring-effect work in the same direction:
Shifting production towards more high skill intensive activities. However, using this graphical
framework, it is easy to show, that results would not be as clear cut when offshoring would take place
in the relative low (high) skill intensive industry by relocating its relative high (low) skill intensive
part of production. As Horgos (2009a) shows formally, results strongly depend on the assumed
elasticity of substitution between low and high skilled labor. Assuming Cobb-Douglas elasticities,
the wage-effect always outperforms the offshoring-effect, yielding unambiguous results.