Why Offshoring Is Good and Bad for Workers

by: Ryan Avent

Ann Harrison has a neat new post at Vox which reads in part:

Next, we statistically test whether trade and offshoring has forced workers out of the manufacturing sector. We find that there has been a big movement of workers out of sectors with a lot of import competition. We also look for the impact of offshoring on US manufacturing employment, finding small effects on employment that depend on the location of offshore activities. A 10 percentage point increase in offshoring to low-wage countries reduces employment in manufacturing by 0.2% while offshoring to high-wage countries increases employment in manufacturing by 0.8%.

The beneficial effect of offshoring activities in high-income countries by U.S. firms on their home employment is one of the most surprising findings of the study. The surprising positive effect of offshoring to high income countries on U.S. wages is consistent with some new theories developed by Gene Grossman and Esteban Rossi-Hansberg (2008). They argue that offshoring activities can actually increase wages for workers remaining at home by cutting costs for the companies that employ them.

Of course, the workers remaining at work at home tend to be those in human capital-intensive positions. Ms Harrison includes a couple of good (if fuzzy) charts:


These tell a pretty interesting story about manufacturing in America in recent decades. Real earnings for manufacturing employees have risen for nearly everyone, with the notable exception of those without a high school diploma, but employment has very clearly moved up the educational attainment ladder. Manufacturing has slowly but surely ceased to be a big employer of workers with low levels of education.

Declining manufacturing employment prospects have placed downward wage pressure on those without much education, which has translated into stagnating incomes for less educated workers. This is largely viewed as a trade problem, but it's perhaps better understood as a failure in the market for skilled workers. Employers are demanding that a larger share of workers earn a bachelor's degree or higher, and wages premia are reflecting this, but the supply of educated workers does not appear to be responding.

This article originally appeared on The Economist.com