Offshoring and unskilled labour demand

No great surprise here.

Reminds me of a recent Facebook discussion. Someone disagreed with a comment I made, and said economic models said otherwise. I pointed out that these economic models did not comport with what had actually happened. His response was that I needed to study the models. The economic models seemed to be like a religion to him. If they didn't match reality, well then, we should just ignore reality because it must be wrong.

http://www.voxeu.org/article/offshoring-and-unskilled-labour-demand-new-evidence

Juan Carluccio, Alejandro Cuñat, Harald Fadinger, Christian Fons-Rosen
14 December 2015

Over the last three decades, the perception that unskilled workers are being ‘left behind’ has become a matter of political concern in industrialised economies. The increase in the skill premium, i.e. the wage of skilled workers relative to that of unskilled workers, and the larger unemployment rates among unskilled workers have prompted researchers and policymakers to look into the causes of and the potential remedies to this state of things.

In the search for culprits, two rather apparent phenomena have been the usual suspects. Both skill-biased technical progress and globalisation raise the relative demand for skilled to unskilled workers in the rich world. According to the technical progress explanation, the ICT revolution has biased relative labour demand in favour of skilled workers since modern technologies are operated with more brain and less brawn than those of the industrial era. Computers and skilled workers, in other words, complement each other well, leaving unskilled workers less and less space in the labour market. The globalisation argument is usually framed in terms of the Heckscher-Ohlin (HO) model; the integration of unskilled-labour abundant countries (first the East Asian tigers and Mexico, then China and India) into the world economy leads to an expansion of the rich (skill-abundant) world’s industries that use skilled labour intensively and a contraction of its unskilled-labour-intensive industries, thereby triggering a fall in the demand for unskilled labour and an increase in the demand for skills.

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A number of empirical papers (e.g. Autor et al. 2013 for the US, Mion and Zhu 2013 for Belgium) have provided convincing evidence that import competition from low-wage countries, in particular from China, indeed has a large impact on labour demand in rich countries, hurting mostly unskilled workers, while benefiting skilled ones. Similarly, Hummels et al. (2014) find negative effects of offshoring decisions of Danish firms on wages of unskilled workers,

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The empirical evidence suggesting that globalisation is indeed affecting the income distribution in industrialised countries is much stronger than initially thought, at least as far as the manufacturing industry is concerned. In fact, the productivity gains from having access to cheaper inputs through offshoring are not being distributed equally between different economic actors in our rich societies. Consequently, political resistance to free trade by certain groups has a clear rationale as long as the effects discussed above are not addressed through more effective redistribution policies.