Import competition, offshoring and automation are threatening the middle classes in Europe. New jobs have been created mainly for the lower and the upper segments of the labour market. But not for the middle. And because most of those jobs are in the non-tradable sectors with low productivity growth, this trend also threatens long-term economic growth and increases inequality. Can jobs be created for the middle classes without embracing protective policies?
The struggle to create more and better paid jobs in the middle segments of the labour market in advanced economies is a consequence of what is referred to in economic literature as ‘job polarization’. Pioneering research during the first decade of the 2000s found that the share of employment in occupations that are most associated with the middle class and that pay around the average wage level, like office and customer service clerks, plant and machine operators, and assemblers, has declined rapidly in both Europe and the US. 1 At the same time the share of employment at the upper end of the occupational skill distribution scale – involving jobs associated with critical thinking, judgment and decision-making, complex problem-solving, interacting with computers and thinking creatively – and at the lower end – low-skilled jobs associated with, for example, selling or assisting, serving and caring for others – have increased substantially in the past two decades.
The declining share of the middle segments of the labour market cannot therefore be attributed to the economic downturn of the past seven years, as data shows that employment structures in Western European countries, Japan and the US had been polarizing long before the financial and economic crisis started. 2 And where the ‘squeeze’ of the middle class has often been referred to as an American phenomenon, the IMF’s 2011 World Economic Outlook shows that there is increasing evidence that all advanced economies face "a shift away from middle-income jobs". 3
Although there is consensus that typical middle-class jobs are in decline, it is debatable whether job polarization is occurring in all European countries. According to the IMF, which takes three employment shares (highest-paying, middle-paying, lowest paying thirds) based on wages, the middle class in Austria lost out the most between 1993 and 2006. However, during the same period, the country created high-paid jobs in particular and faced a small decline in low-paid jobs. The same trend of upward job mobility happened in France, Luxemburg and Denmark. However, in most other European countries, like Finland, the Netherlands, the United Kingdom, Sweden and Germany, the decline of the middle class indeed went hand-in-hand with a rise in both low- and high-skilled jobs. Interestingly, the total loss of middle-paid jobs was actually greater in the European Union than in the US (see tables). The economic malaise after 2007 accelerated the trend towards job polarization. During the great recession in Europe, it was especially low-paid service-sector jobs that continued to grow in terms of labour share, while manufacturing-sector and public-sector jobs declined at faster annual rates. 4
Long-term European job polarization explained
According to Eurofound’s economist Enrique Fernández-Macías, however, who uses relative change in employment by wage and skill quintiles, the picture is more diffuse, but explainable. 5Again, without doubt, typical middle-class jobs lost out between 1995 and 2008, but this was not always accompanied by a significant rise in lower-skilled jobs (see also Enrique Fernández-Macías’ expert opinion). Fernández-Macías found that continental European countries like the Netherlands, Germany, France and Belgium are most prone to job polarization. His explanation is that, at the same time, these countries experienced a very significant process of de-standardization of their lowest paid jobs which was absent elsewhere in Europe. The 1990s debate on the ‘eurosclerosis’ of continental Europe and the subsequent attempts by these countries to deregulate employment to create more jobs at the low end of the labour market.
In other parts of Europe, this did not take place at the same pace. Three Nordic countries Denmark, Finland, and Sweden, for example, experienced a similar process of unambiguous upgrading in their employment structures, however, with no growth in the bottom two quintiles and a very significant expansion of the top and second quintiles. This is explained by the fact that these countries have the strongest unions and the most compressed wage structures in Europe, which makes low-paid jobs comparatively expensive and tends to shift production towards higher value-added activities. And also significantly, these countries did not experience the same deregulation process as continental Europe, at least in the period before 2008.
Southern Europe is associated with a pattern of upgrading typified by a significant expansion of the middle layers of employment. This is probably the result of a different kind of process: the very fast pace of employment expansion that these countries experienced after the creation of the European Monetary Union and their access to unprecedentedly lax financial conditions. The resulting bubble in the construction sector led to an enormous expansion of jobs in the middle quintiles, especially in Spain, but also in Greece and Italy. Finally, the mild polarization with a very strong upgrading of the United Kingdom and Ireland seems consistent with the flexibility of their labour markets and the very large expansion of their financial sectors throughout the 1990s and early 2000s.
The drivers behind the decline of middle-class jobs
Generally speaking economists come up with two explanations for changing employment and occupation structures: technological change and economic globalization. In the 1980s and 1990s, the dominant view among labour economists was that technology was more important than trade as a driving force behind changes in the structure of employment. 6 Change was biased in favour of skilled workers, leading to the hypothesis of ‘skill-biased technological change’ in which jobs that are created by new technology need higher skills, which lead not only to higher productivity but also to more and better (paid) jobs. 7 This means that in time, thanks to technology and by adapting to better skills, workers will improve their economic situation.
More recently, views have been shifting somewhat. First, there are different views on the impact of technological change on demand for different types of labour. Some believe that technology mainly replaces human labour in routine tasks – tasks that can be expressed in step-by-step procedures or rules – but cannot as yet replace human labour in non-routine tasks. This is known as ‘routinization-biased technological change’ in which the important point is that ‘routine’ does not map simply into a one-dimensional definition of skill. 8 Although low-skill production-line jobs in manufacturing can be characterized as ‘routine’, so can many more skilled craft jobs and many clerical jobs that have never been the lowest paid jobs in the economy. By contrast, many of the worst-paying jobs, for example in housekeeping, hotel & catering and personal care, are non-routine in nature and have therefore been relatively unaffected by technological change. The result is job polarization. However, this more nuanced view has recently been criticized. There is a concern that new technologies will lead to the loss of many jobs that were considered non-routine, such as bus drivers, jobs in the financial sector, teaching and caring tasks as computerization advances much faster than previously assumed 9. (See much more on the debate about automation in article 'Better skills will not save middle-class jobs from automation' by Jo Michell.)
The second shift in the economic debate is a growing awareness that the impact of economic globalization on employment in advanced economies has been underestimated for too long. 10Concerns relating to trade openness, offshoring and outsourcing in the 1980s and 1990s were largely about the displacement of low-skilled manufacturing jobs to lower-wage countries. 11Mainstream economists did not see a problem because manufacturing jobs would be replaced by high-end jobs in innovation and design and by a flourishing service sector. The major shift in economists’ views is the realization that goods trade with low-wage countries has contributed to the demise of manufacturing employment in the US and many European countries without sufficient upper-end jobs being created by way of compensation. 12
The rapid economic growth of countries like India, Turkey, Brazil and China in recent years has made many feel that globalization is having a more powerful effect on the structure of employment now than in the 1980s. The focus of concern now is the prediction that service-sector jobs will relocate to developing countries, followed quickly by jobs relating to certain parts of the production process, like technology, innovation and design. 13 This article will look more closely at these arguments and what policies are needed.
There is another driver that has not been mentioned much by economists in the debate about job polarization: the importance of social policy and the institutional change. As shown above, job polarization between 1995 and 2008 in continental Europe could be related to the process of deregulation of employment relationships, declining trade union power and their traditional policy of wage compression (see more on the impact of social protection on the middle class in article 'A divided middle' by Ursula Dallinger).
The link with productivity
New is the realization that the loss of middle-class jobs in advanced economies is related to a shift away from industries with high productivity levels and high productivity growth. For example, the construction sector and the financial services sector (which includes finance, insurance and real estate) experienced large employment increases during the housing boom of the pre-crisis period, but these sectors are not associated with high productivity levels. At the same time, there has been a significant decline in jobs in the manufacturing sector, which is well-known for its high productivity levels and productivity growth, also in countries like Japan and Germany where the sector is large and powerful. 14
This trend goes against the way countries have developed historically: reallocating labour from low- to high-productivity sectors increased national income and provided better job opportunities.
15 With the opposite now happening, jobs mainly being created in below-average productivity growth sectors (in both the low-skilled or high-skilled segments of the labour market), there is a common belief among economists that this will hamper economic output growth, continue to reduce the labour share in national income in favour of capital (see article 'Profits without labour benefits' by Rolph van der Hoeven), increase inequality, and obstruct the creation of more and better jobs that are so urgently needed.
For many years, mainstream economists held the view that economic globalization benefits the economy as a whole, generating competitive markets in which highly-productive sectors benefit the most via comparative advantage. Less productive markets that need state intervention to survive disrupt the market mechanism at the expense of the productive sectors. In an open market the labour force will move away from sectors that are not performing to healthy sectors that can compete at international level. The winning sectors become the cornerstone of economic growth and the economy should thrive because of the increasing competitiveness, creating more and better jobs. 16
But the notion that creating jobs has been associated with low productivity gains assumes that something different is going on: workers are not adjusting to move towards more internationally competitive jobs. There are different views on how the labour force adjusts to trade openness. Some argue that blue-collar workers in particular have limited mobility to move to places with better job opportunities. Others point to the age of displaced workers to account for their sluggish adjustment. The older laid-off workers are, the lower their incentive to invest in retraining for a new job or relocating. 17
So what jobs are actually created and for whom as a result of economic globalization? And does economic globalization destroy more jobs than it creates? These are fundamental questions that can explain the decline of traditional middle-class jobs. Much of the research into economic globalization and its impact on middle-class jobs is focused on the US. Economists David Autor of the Massachusetts Institute of Technology, David Dorn of the University of Zurich, and Gordon Hanson of the University of California in San Diego estimate that rising Chinese import competition explains 25% of the decline in US manufacturing employment between 1991 and 2000, and 41% of the decline between 2000 and 2007. 18 They find that import exposure in the short and medium term leads to such a shift in the labour market and increases unemployment that it spurs a substantial increase in transfer payments to individuals and households in the form of unemployment insurance benefits, disability benefits, income support payments, and in-kind medical benefits. Their estimates imply that losses in economic efficiency from trade-induced increases in the usage of public benefits are, in the medium run, of the same order of magnitude as US consumer gains from trade with China (lower prices).
There is however a substantial body of evidence showing that foreign competition, especially from low-wage economies, can displace low- and medium-skilled workers in all advanced economies. 19 But there is more. Research also shows that many jobs in advanced economies have been created in the non-tradable sectors. On the whole, tradable sectors like technology, consulting and finance have performed well but have not created a significant number of jobs. The retail, construction and hotel & catering sectors were among the major creators of jobs, but these were non-tradable. This shows that there is a relation between import competition and offshoring and the reduction in tradable sector jobs, mainly in the productive sector, which has resulted in the decline of typical middle-class jobs. 20
What about the higher-skilled workers in the middle class? Research shows that offshoring firms employ more people in R&D and design, introduce new products and invest in advanced process technologies more frequently than non-offshoring firms. 21 This means more opportunities for high-skilled workers. Furthermore it seems that, at least for European and American firms, when firms start employing high-skilled workers offshore, they also increase the numbers of high-skilled workers employed at home. 22
This means that offshoring is not, as yet, having a negative impact on jobs created in the higher-skilled segments of the labour market. That explains the trend of job polarization and the upward job mobility in many European countries. However, the evidence is focused on the micro-level of large corporations while, for an economy as a whole, there is no guarantee that the higher skills will not be affected by economic globalization. Especially because most jobs – including high-skilled jobs that have been created by economic globalization (which is more than just offshoring) – are in sectors with low-productivity growth, are likely to be concentrated more in the non-tradable sectors, while also threatened by automation. This will in time have an impact on higher-skilled jobs as well.
The impact of globalization on wages
Till now the evidence focused mainly on what jobs have been created. But what impact are offshoring and trade openness having on wages? There is evidence that higher levels of social protection and investments in training to reduce skill gaps could adjust to the shocks caused by trade openness. In the US it seems that wage movements for specific occupations can be linked directly with economic globalization. 23. The evidence is much less clear for European countries. Figures from Germany and the UK suggest that relative occupational wage movements in Europe are not strongly correlated with offshoring variables. Although this differs from the evidence for the US, it is not necessarily inconsistent with it since manyEuropean countries have institutions (e.g. minimum wages and collective bargaining) that mute or stop a wage response, especially across middle- and lower-paying occupations. 24 (The article 'A divided middle' by Ursula Dallinger in this dossier focuses on the influence of social protection on the European middle class.) However, there is an increasingly widespread view that, also in European countries, offshoring increases the wages of high-skilled workers and decreases those of low- and medium-skilled workers, thus contributing to rising wage inequality. 25
The middle therefore face not only their jobs being replaced, but also a strong decrease in their relative wages. Trade liberalization lowers the long-run wage in the import-competing sector relative to the export sector. 26 Training and reducing relocation costs can significantly help reduce the adjustment costs for workers, especially in the long term, as they increase the number of better-skilled workers. This means that, in the short term, as a consequence of trade openness, wage inequality could be explained by inter-sectoral wage inequality between the winning and losing industries, while in the long run it is driven by an increase in the skill gap. 27 For middle-class workers, especially in import-competing sectors, it is important to achieve the right conditions to adjust to trade shocks, because that would be the difference between them gaining from them or losing out, with the threat of having to find work in lower paid non-tradable service sectors.
Will Reshoring Benefit the Middle
“...now in the US, shale gas energy is fuelling a ‘manufacturing renaissance’. Low-cost energy is causing the reshoring of industrial work. This means industrial work is relocated back to the United States after it was originally offshored to lower-cost countries. This reshoring is further enhanced by rising labour costs in the emerging economies of Asia. In 2012, The Economist published an article about “the end of cheap China”, to emphasize how labour cost in the coastal provinces surged 20% per year in the past four years. 28 Wages in Europe and the United States have barely increased during the past decade, since companies, particularly in the US, have obtained massive concessions from unions.
In late 2013, a decade after closing its last US factory, Apple announced that it would build a new, renewable energy-powered factory in Arizona, which should create 2,000 jobs. 29 Google-owned Motorola also decided to start assembling its cell phones in the US, albeit for an hourly wage of $9.00. 30 Such compensation reflects the emergence of what Guy Standing regards as ‘the new precariat’. 31 A growing number of workers across the world (and increasingly in the West) rely on a series of short-term jobs without social protection, career prospects or opportunities for skill acquisition. (See also the article, 'Job insecurity as the norm'.)
Reshoring is not only an American phenomenon. It can be recognized in Europe as well, especially in the United Kingdom, Sweden and the Netherlands. Evidence from the UK’s Manufacturing Advisory Service (MAS) suggests significant potential benefits for the UK and Europe. What manufacturers are now looking for is not only low wage levels, but also competitive corporate tax rates, a good regulatory environment and a strong legal framework – things that Europe have to offer. That reshoring benefits the US manufacturers more than in Europe mainly has to do with the fact that European manufacturers outsourced less to China. They instead relied on central and eastern European suppliers where the cost of manufacturing has not shifted as much in recent years. 32
The newly-created manufacturing jobs are welcomed with some patriotism, although the number of new jobs will by no means compensate for the nearly 10 million manufacturing jobs that the US has lost since the late 1970s. Furthermore, with the hourly rates mentioned above, the manufacturing sector won’t revive the US’s shrinking middle class. The Pew Research Center refers to ‘the lost decade of the middle class’ to emphasize how, since 2000, the US middle class has shrunk in size, fallen backward in income and wealth, and shed some of its characteristic faith in the future. 33 The middle tier of US society now accounts for 45% of the population, down from 62% four decades ago. The middle class, who traditionally acts as a wedge between the poor and the elite, is often regarded as a prerequisite for sustainable economic growth and development and a source of social stability.”
Source: The Broker article by Niels Beerepoot ‘Creating a global labour market’
Smoothing structural change
There is an increasing awareness among economists and politicians that middle-class workers must be enabled to sustain their families and offer better opportunities for their children while they are at risk of being forced down the income ladder by economic globalization. As mentioned above, one solution that most experts put forward for the hollowing out of middle-income jobs lies in retraining, better education and increased productivity in non-manufacturing sectors. Given the ongoing structural changes and the need to adapt, education and skills have to be improved over time and governments have to promote and subsidize lifelong learning. But action is also needed to cushion some of the human costs of structural change, as workers are becoming prone to falling wages and to changes in the risk level and duration of unemployment due to economic globalization.
As economist Michael Spence argues, redistribution and social protection measures must be part of the policy response: the potential benefits include increased social cohesion and continued support for globalization. He cautions that if the employment challenges confronting the advanced economies are not tackled, countries may resort to “protectionist measures on a broad front [and] the global economy will be undermined”. Unemployment benefits and employer subsidies can raise employment and economic efficiency and mitigate distributional consequences. Employment benefits can support short-run adjustment because they help individuals undertake the move to new activities despite an initial wage cut. However, workers move slowly between activities not just because there are search costs, but largely because sector-specific skills and experience can be lost in transitions. Therefore employment subsidies are a more effective tool to address the loss of sector-specific skills because employment subsidies raise workers’ incentives to invest in new skills. 34
However, this does not change the structural causes of the decline in middle-class jobs. To combat that, work must again be linked with productivity growth. And as economic globalization is only one of many different drivers of the trend towards less productive jobs for the middle class (others being, for example, automation and financial globalization) a simplistic solution based solely on skills and education will not change a lot for the middle. Change is needed. And that means thinking about the whole structure of the global economy: starting with the ownership of capital, revaluing labour rather than capital, and investing in productive sectors that are more inclusive and sustainable for long-term economic growth. The good news is that now the pressure of economic globalization is being felt by the middle class, the political cornerstone of democratic states, European politicians are more aware of the consequences and are more willing to act than in the past decade.
The way they will react will be decisive for the future of Europe – economically and politically. This does not mean that Europe must be afraid for doing business on the global level. On the contrary, it should develop an alternative economic globalization agenda in cooperation with other global players that will reverse the short-termism adopted from financialization, reverse the global race to the bottom, and redress the current bias towards the supply side of the economy by recognizing the importance of demand-side policies (wage-led growth). Only then can the European middle class benefit more equally from economic globalization, and the middle will not see the rise of emerging countries only as a threat but as an opportunity on which to build a new future.
Photo credit main picture: Loading Cargo / International Labour Organisation via flickr
For example, by economists David Autor, Lawrence Katz, Melissa Kearney, Maarten Goos, Alan Manning, and Anna Salomons.
Maarten Goos, Alan Manning, and Anna Salomons (2011), Explaining Job Polarization in Europe: The Roles of Technology, Globalization and Institutions, Centre for Economic Performance discussion paper no. 1026.
IMF, World Economic Outlook, Slowing growth, rising risks, September 2011.
Eurofound reports that, in 2011-2013, the manufacturing and construction sectors continued to shed employment, but with a lower intensity (especially in manufacturing) than in the 2008-2010 period, when both sectors shed an average of 5% of employment per year. Developments in these two sectors are the main factors behind a reduction in the annual employment decline, from -1.2% to -0.3%. But also austerity-led public spending cuts have led to a stalling of employment growth in the public services, including health and education services in 2011-2013. These were the main source of resilience in the labour market during 2008-2010, when employment continued to grow by 1.6% per year. Within the broad category of public services, there has been a sizeable 5% decline in staff numbers in public administration and defence, alongside suppressed growth in health and education. Private sector service employment (excluding retail) has increased but contributes only modestly (0.4% per annum) to compensate for job losses in other sectors. Employment is increasing in the retail sector at a faster rate than in other service sectors; however, retail shed more employment during 2008–2010. There was negative growth of blue-collar jobs during both periods across all sectors except retail. High-skilled blue-collar jobs in the manufacturing and construction sectors have been at particular risk, and men have been most affected. Source: Eurofound (2014), Drivers of recent job polarisation and upgrading in Europe: European Jobs Monitor 2014, Publications Office of the European Union, Luxembourg
Enrique Fernández-Macías (2012), Job Polarization in Europe? Changes in the Employment Structure and Job Quality, 1995-2007, Work and Occupations XX(X) 1–26
See for example George Johnson (1997), ‘Changes in Earnings Inequality: The Role of Demand Shifts’, Journal of Economic Perspectives, Vol. 11, 41-54; Thibaut Desjonqueres, Stephen Machin and John Van Reenen (1999), ‘Another Nail in the Coffin? Or Can the Trade Based Explanation of Changing Skill Structure Be Resurrected?, Scandinavian Journal of Economics, Vol. 101, 533-554; David Autor and Lawrence Katz (1999), ‘Changes in the Wage Structure and Earnings Inequality’, Handbook of Labor Economics Volume 3A, 1463-1555. Also mentioned in Maarten Goos, Alan Manning, and Anna Salomons (2011), Explaining Job Polarization in Europe: The Roles of Technology, Globalization and Institutions, Centre for Economic Performance discussion paper no. 1026.
See for example Alan Krueger (1993), ‘How Computers Changed the Wage Structure: Evidence from MicroData’, Quarterly Journal of Economics, Vol. 108, 33-60; Eli Berman, John Bound, and Stephen Machin (1998), ‘Implication of Skill-Biased Technological Change: International Evidence’, Quarterly Journal of Economics, Vol. 113, 1245-1279; Stephen Machin, and John van Reenen (1998), ‘Technology and Changes in Skill Structure: Evidence from Seven OECD Countries’, Quarterly Journal of Economics, CXIII (1998), 1215-44; David Autor, Lawrence Katz, and Alan Krueger (1998), ‘Computing Inequality: Have Computers Changed the Labor Market?’, Quarterly Journal of Economics, Vol. 113, 1169-1213. Also mentioned in Maarten Goos, Alan Manning, and Anna Salomons (2011), Explaining Job Polarization in Europe: The Roles of Technology, Globalization and Institutions, Centre for Economic Performance discussion paper no. 1026.
David Autor, Frank Levy, and Richard Murnane (2003), ‘The Skill-Content of Recent Technological Change: An Empirical Investigation’, Quarterly Journal of Economics, Vol. 118, 1279-1333.
Carl Benedikt Frey and Michael A. Osborne (2013), The future of employment: how susceptible are jobs to computerisation?, Oxford University publication, September 2013.
Economic globalization has been defined by Michael Spence, who shared the Nobel Prize for Economics in 2001, as worldwide market integration, which was made possible first by technology and management expertise that reduced barriers like transportation costs and the costs of managing far-flung plants, and second by a decline in tariffs on tradable goods (trade liberalization) and other political barriers. Source: Michael Spencer, The Evolving Structure of the American Economy and the employment challenge, Working paper for the Council on International Relations
The concern about competition from low-wage countries existed in the 1980s, but such competition was comparatively unimportant, since most trade of wealthy countries happened with other wealthy countries. Since the 1990s, however, a rapidly rising share of wealthy countries’ trade is with low-wage countries, and that type of trade is more disruptive for Western labour markets. Most of the increase in trade with low-wage countries is due to China, while India plays a minor role’, according to co-reader David Dorn.
See for example the Chicago Expert Panel.
For example Gene Grossman and Esteban Rossi-Hansberg (2008), ‘Trading Tasks: A Simple Theory of Offshoring’, American Economic Review, 98(5), 1978-1997; Andres Rodriguez-Clare and Natalia Ramondo (2010), ‘Growth, Size and Openess: A Quantitative Approach’, mimeo.; Daron Acemoglu and David Autor (2011), ‘Skills, Tasks and Technologies: Implications for Employment and Earnings’, Handbook of Labor Economics Volume 4, Orley Ashenfelter and David E. Card (eds.), Amsterdam: Elsevier. Daron Acemoglu, Gino Gancia and Fabrizio Zilibotti (2010), ‘Competing Engines of Growth: Innovation and Standardization’, mimeo.
Duarte, Margarida, and Diego Restuccia, 2010, ‘The Role of the Structural Transformation in Aggregate Productivity’, The Quarterly Journal of Economics, Vol. 125, No. 1, pp. 129–73, as was mentioned in: IMF, World Economic Outlook, Slowing growth, rising risks, September 2011.
McMillan, Margaret S., and Dani Rodrik, 2011, ‘Globalization, Structural Change, and Productivity Growth’, NBER, Working Paper No. 17143 (Cambridge, Massachusetts: National Bureau of Economic Research).
As explained earlier in two articles by The Broker on revaluing labour and embracing inclusive growth, mainstream economic theory assumes that labour moves smoothly from one sector to another (employment reallocation) , as the focus is on the long-term benefit. But empirical evidence suggests that switching sectors entails very high costs. Concerns about the effects of trade on employment have led to the introduction of trade adjustment programmes in the US and the EU.
Artuc, E., Chaudhuri, S., McLaren, J. (2010), ‘Trade shocks and labour adjustment: a structural empiric approach’, The American Economic Review no. 100, investigate the implications of moving costs on job reallocation and wages following trade liberalization. They obtain very high average moving costs, and a very high standard deviation of costs on moving from one broadly aggregated sector of the economy to another. These costs suggest sluggish adjustment of the labour market to a trade shock, with the economy requiring several years to approach the new steady state.
David H. Autor, David Dorn, and Gordon H. Hanson (2013), The China Syndrome: Local Labor Market Effects of Import Competition in the United States, American Economic Review 2013, 103(6): 2121–2168
Ann Harrison and Margaret McMillan (2011), Offshoring Jobs? Multinationals and U.S. Manufacturing Employment, The Review of Economics and Statistics
The evidence is clear for the US, as research from Michael Spence, who shared the Nobel Prize for Economics in 2001, estimated that, looking back on the period from 1990 to 2008, 97% of the 27.3 million US jobs created were in the non-tradable sector, where the US does not face international competition. Government and health care accounted for 40% of jobs created in that period. However, by looking at the EU the dis-balance between countries’ export sectors performance the evidence for Europe can be very diverse.
Carl Davidson and Susan Zhu show that, in Sweden, increasing exposure to globalization leads to more assortative matching. That is, more productive firms attract more skilled workers, and more skilled workers prefer to work for more productive employers with export activities. This matching of similar with similar offers an extra efficiency gain as trade strengthens matching in the export sector and heightens income inequality, but assortative matching in the import-competing industry may worsen.
Rachel Griffith, Helen Miller, Laura Abramovsky ( 15 March 2012), Offshoring of high-skilled workers is not a zero-sum game, VoxEU publication; and: Bernhard Dachs, Bernd Ebersberger, Steffen Kinkel, Oliver Som (7 September 2013), Does offshoring hurt domestic innovation activities?, VoxEU publication
There is, for example, evidence from the US that workers in the auto industry are forced to accept lower wages when other auto plants relocate some of their operations abroad. (Marion Jansen, Ralph Peters, Jose Manuel Salazar-Xirinachs (2013), ‘Trade and Employment: From myths to facts’, ILO.) This threat is lower when affiliate activities are established in Europe where wages are more or less the same or even higher. However, most firms relocate to developing countries, exerting downward pressure on wages. This means that firms which find it easier to relocate to regions with lower labour costs have an advantage in their bargaining with trade unions on lower wages for the remaining workers. In short, foreign competition has an impact on wage-setting practices, at least in the US. The necessity of a shift in thinking on international trade and employment has been illustrated in the International Labour Office’s (ILO) 2013 report ‘Trade and Employment: From myths to facts’. It emphasizes the knowledge gaps and shortage of evidence in the trade debate. For example, most of theoretical and empirical trade research ignored major trade-related realities, such as the existence of trade costs, the role of individual firms in trade performance, and the existence of informal labour markets. There is now a growing body of academic literature linking those new theoretical and empirical approaches to labour markets and to employment, but it is still in its infancy. The ILO also shows that economists continue to struggle with the question of how to assess the combined effects of trade policy as trade affects the labour market in many ways from the quality to the quantity of jobs. See also David Autor, Lawrence Katz, and Melissa Kearney (2008), ‘Trends in U.S. Wage Inequality: Revising the Revisionists’, Review of Economics and Statistics Vol. 90 (May 2008), 300-23; Lemieux, Thomas (2008), ‘The Changing Nature of Wage Inequality’, Journal of Population Economics, 21(1), January, 21-48; Autor, David, and David Dorn (2010), ‘Inequality and Specialization: The Growth of Low-Skill
Service Jobs in the United States’, January 2010, mimeo MIT.
Christian Dustmann, Johannes Ludsteck and Uta Schönberg (2009), ‘Revisiting the German Wage Structure’, Quarterly Journal of Economics, Vol. 124:2, May 2009, and, Maarten Goos and Alan Manning (2007), ‘Lousy and Lovely Jobs: The Rising Polarization of
Work in Britain’, Review of Economics and Statistics, Vol. 89 (February), 118-133.
In many countries, increases in wage differentials between occupational, demographic and skill groups have significantly contributed to the increase in inequality. For the EU, despite the recent trend toward higher education, the earnings of low-skilled workers (defined as those with below upper secondary education) in employment decreased relative to the earnings of medium-skilled workers (with upper secondary or post-secondary non-tertiary education) between 2000 and 2011. At the same time, the earnings of high-skilled workers (with tertiary education) have increased relative to medium-skilled workers. Source: The Effects of Globalization on Wage Inequality: New Insights from a Dynamic Trade Model with Heterogeneous Firms, Working Paper no. 49, WWWforEurope, Welfare, Wealth and Work, Mariya Mileva, Sebastian Braun, Wolfgang Lechthaler, December 2013.
The Effects of Globalization on Wage Inequality: New Insights from a Dynamic Trade Model with Heterogeneous Firms, Working Paper no. 49, WWWforEurope, Welfare, Wealth and Work, Mariya Mileva, Sebastian Braun, Wolfgang Lechthaler, December 2013. http://www.foreurope.eu/fileadmin/documents/pdf/Workingpapers/WWWforEurope_WPS_no049_MS4.pdf
The Economist (2012) ‘The End of Cheap China: What do soaring Chinese wages mean for global manufacturing.’ The Economist.
Rhodan, M. (2013) ‘Apple Will Open a Manufacturing Plant in Phoenix Suburb.’ TIME.
Garside, J. (2013) ‘Apple creates 2,000 jobs shifting production back to the United States.’The Guardian.
Weissmann, J. (2013) ‘Motorola’s new smartphone: Made in the United States’.The Atlantic.
Standing, G. (2011) ‘The Precariat: The new dangerous class.’ Bloomsbury Academic.
Smith, P. (2012) ‘Re-shoring benefits US manufacturers more than European – Why?’ Spend Matters UK/Europe.At the World Economic Forum 2014 in Davos, the UK Prime Minister, David Cameron, discussed his strategy for making Britain the ‘Reshore Nation.’ In the UK, as part of the government’s response to the challenge and opportunity of reshoring, the UK Trade & Investment (UKTI) and the Manufacturing Advisory Service (MAS) are joining forces to launch Reshore UK. The new joint service will identify reshoring opportunities in UK supply chains. UKTI will use its global networks to attract foreign companies to invest, and MAS (and partners) will help UK businesses to bring work back to the UK.
Pew Research Center (2012) ‘Fewer, Poorer, Gloomier: The Lost Decade of the Middle Class.’ PEW Research Center.
Kerem A. Cosar (2013), ‘Adjusting to Trade Liberalization: Reallocation and Labor Market Policies’, manuscript.