Labour Demand, Offshoring and Inshoring: Evidence from Swedish Firm‐level Data

• DOI: http://doi.org/10.1111/twec.12396
• Date: 01 February 2017
• Published date: 01 February 2017

Labour Demand, Offshoring and

Inshoring: Evidence from Swedish

Firm-level Data

Linda Andersson, Patrik Karpaty and Selen Savsin

Örebro University School of Business, Örebro University, Örebro, Sweden

1. INTRODUCTION

Offshoring, usually measured in terms of imports of intermediates, means that a firm may

take advantage of gains from division of labour as the firm specialises and sources cer-

tain stages of the production process to other countries. National concerns have been raised

against domestic firms exporting low-skilled jobs as production is located abroad. However,

vertical fragmentation of production between countries may also substitute for other activities

such as high-skilled labour at home when a foreign supplier is more efficient (OECD, 2005).

In fact, during the last decade, in many industrialised countries, the interest has shifted from

the export of low-skilled jobs towards potential effects on high-skilled labour (Markusen and

Strand, 2008). Offshoring has received much attention both in media and in the international

trade literature, while discussions on effects of inshoring, or firm-level exports of intermediate

goods or services, have been rather silent.

1

The latter may, however, be non-negligible, and it

is reasonable to expect that any firm-level effects from offshoring at least partly can be coun-

ter-acted or reinforced if the firm is also engaged in inshoring. The objective of this paper

was to analyse compositional employment effects of fragmentation at the firm level account-

ing for both offshoring and inshoring, also distinguishing between trade in intermediate goods

and services.

While concerns have been raised against labour market effects due to goods offshoring, the

public discussion and academic interest have turned to services offshoring (UNCTAD, 2004).

As a result of technological advances in information and communication technology (ICT)

and lower costs for travel and transports, it has become easier to source business services,

such as programming, design, accounting and medical services from foreign suppliers. The

trend to move the provision of these services abroad may potentially substitute for the labour

engaged in these services at home.

2

As opposed to trade in services, trade in intermediate

goods has existed for several decades and many manufacturing firms thus have already

The authors would like to thank an anonymous reviewer, Patrik Gustavsson Tingvall, B€

orje Johansson,

Erik Mellander and participants at the 3rd IZA@DC Young Scholar Program and Jena Summer

Academy on Innovation and Uncertainty hosted by Friedrich Schiller University and Max Planck

Institute of Economics for valuable comments on a previous version of the paper. We are grateful to the

Swedish Central Bank (Sveriges Riksbank) for providing data on services imports.

1

The term inshoring was first introduced by Liu and Trefler (2008). In their framework, inshoring refers

to ‘[t]he sale of services produced in the United States to unaffiliated parties in low-wage countries’.

In our framework, we extend the definition to include both affiliated and unaffiliated parties in low- and

high-wage countries.

2

Lejour and Smith (2008) claim that in most OECD countries, as much as 40 per cent of employment

within the manufacturing industry could actually be working with services.

©2016 John Wiley & Sons Ltd

240

The World Economy (2017)

doi: 10.1111/twec.12396

The World Economy

adapted their organisation of the production to stay competitive on a global market. However,

not much attention has been paid to services offshoring in the empirical literature. This is

partly due to lack of data about trade in services but perhaps more importantly that many ser-

vices are non-tradable. Some exceptions are Amiti and Wei (2005), Liu and Trefler (2008),

and Andersson et al. (2016) that specifically analyse labour market effects from services off-

shoring. The conclusion from these studies is that international trade in services may have

implications on the labour market in the home country. There is by now increasing concerns

that newly industrialised countries such as China, India and transition economies in Central

and Eastern Europe are accumulating an increasing number of highly educated labour and that

these countries are becoming increasingly competitive in providing both goods and services.

If firms move production of intermediate goods or services to these countries, one may expect

both low and high-skilled jobs to be exported (offshored) to these countries (Markusen and

Strand, 2008; Chazarreta, 2011).

Even though any potential effects in a firm cannot easily be understood from offshoring

only, there are, to the best of our knowledge, no previous study that attempts to separate

between labour market effects due to inshoring and offshoring of intermediate goods and ser-

vices, resp ectively. Using firm-level data for Denmark, Humm els et al. (2014) identify net

globalisation effects using total export as a measure for inshoring. Liu and Trefler (2008) con-

sider offshoring and inshoring of services, but only between the United States and China and

India. Both these studies find positive net effects on the demand for high-skilled labour. Clo-

sely related is a survey of Danish firms by Ørberg Jensen et al. (2006). Although the focus

there is on general labour market effects, the authors consider both offshoring and inshoring

to establish firm-level net effects in the service and retail sectors. However, none of these

studies have all the necessary firm-level data to thoroughly identify the net adjustments that

firms make in terms of labour demand and skill composition as a response to offshoring and

inshoring.

The intention with this paper is to expand the literature on within-industry effects due to

trade competition by simultaneously analysing the relationship between relative labour

demand and both offshoring (imports of intermediates) and inshoring (exports of intermedi-

ates) using a full census panel data of firms, thus avoiding potential selection problems. Our

study is closely related to Andersson et al. (2016) who also analyse relative demand for

skilled labour in Swedish manufacturing firms, distinguishing between goods and services off-

shoring. In this study, we take the analysis one step further and incorporate inshoring to con-

trol for potential additional effects (offsetting or reinforcing effects) on the skill composition.

Our data allow us to separate out exports of intermediate goods and services from total

exports or exports of finished goods. This is close to Hijzen et al. (2011) but in contrast to

Biscourp and Kramarz (2007) and Hummels et al. (2014) who use general exports. The anal-

ysis is conducted to identify possible labour composition effects due to offshoring and inshor-

ing after controlling for other determinants such as firm-level R&D and capital stocks. The

advantage of using firm-level data is that one can control for heterogeneity across firms. We

use an instrumental variable estimation approach to control for potential endogeneity in off-

shoring and inshoring, where firm-level measures of world export supply, world import

demand and the world number of internet users are explored as instruments; the former two

were originally suggested by Hummels et al. (2014). As an extension of the main analysis,

we explore the richness of the data to see whether the findings are general to all firms in

terms of size, ownership, kind of production technology and whether the kind of service sub-

ject to import or export matters for the skill composition.

©2016 John Wiley & Sons Ltd

LABOUR DEMAND, OFFSHORING AND INSHORING 241

To preview our results, the relative demand for high-skilled labour tends to increase due to

offshoring of services, while there is no statistically significant effect of inshoring per se. This

indicates a net increase in the relative demand for skilled workers due to services offshoring.

The economic size of the effect is, however, relatively small. In addition, we present some

correlations that indicate heterogeneous effects, driven by large and R&D-intensive firms but,

maybe surprisingly, not multinational firms. We also find that knowledge-intensive services

such as ‘computer and information services’ and ‘financial services’ are positively associated

with relative demand for skilled labour.

The paper is organised as follows. In Section 2, we review the literature and Section 3

describes the theoretical links between offshoring, inshoring and labour demand. Data are pre-

sented in Sect ion 4, and Sect ion 5 disc usses patterns of the skill share, inshoring and off-

shoring in Swedish manufacturing firms for the study period. The empirical specification,

econometric considerations and the estimation results are presented and discussed in

Section 6. The paper concludes with Section 7.

2. LITERATURE REVIEW

Even though offshoring has been vividly debated recently, the ‘fear’ literature on the ‘Third

World’s’ economic growth and their increasing market shares actually goes back to the 1990s.

Krugman (1994) examines the increasing fears about the impact of competition from low-wage

countries by examining patterns of wages and productivity in the industrialised countries. How-

ever, he finds that the effects of outsourcing (imports of multinationals) have been very small.

Similarly, Berman et al. (1994) identify that sourcing parts and components from abroad can

indeed affect the composition of labour demand for labour in manufacturing, but the effect is

very small. In line with Berman et al. (1994), the seminal papers by Feenstra and Hanson

(1996a, 1996b) started a large literature studying what impact offshoring may have on the

observed rising relative wage for skilled workers (see, e.g., Egger and Egger, 2003; Strauss-

Kahn, 2004; Ekholm and Hakkala, 2006). All of the above studies constitute one wing of the

offshoring literature which links offshoring with wage inequality (between high-skilled and

low-skilled workers; see Table A1 in the Appendix). Most studies focusing on relative labour

demand effects are based on industry-level data. The general conclusion is that offshoring,

especially to low-income countries, lowers the relative demand for low-skilled labour, at least

in manufacturing. To the best of our knowledge, Andersson et al. (2016) is the only study with a

similar focus but using firm-level data. Their results clearly indicate that it is important to distin-

guish between services and materials offshoring. Relative demand for skilled labour increases as a

response to services offshoring while there is no significant effect of materials offshoring.

Due to more recent technological improvements, the production of services, both in the

service sector and in services produced in manufacturing, has made offshoring of services

more tangible. This has put the fear in developed countries of losing jobs to developing coun-

tries into a new perspective since the fear expanded from low-skilled to high-skilled-intensive

tasks being affected. As a second strand of the literature, more recent empirical studies have

considered the total labour demand effect of offshoring, by including some of the services

sectors (see Table A2 in the Appendix). The overall results in this literature show that there is

either no effect of services offshoring on total labour demand, or the effect is negative but

only very small (smaller than effects from material offshoring).

Grossman and Rossi-Hansberg (2008), on the other hand, formulate a theoretical model of

offshoring as trade in tasks rather than the common meaning of trade in intermediate

©2016 John Wiley & Sons Ltd

242 L. ANDERSSON, P. KARPATY AND S. SAVSIN