Offshore vs. Onshore

Highly trained radiologists are needed to interpret computer-tomography images and X-rays; but some of those skillintensive tasks are performed offshore today, by US- or EU-trained doctors living in South Asia or Australia. A janitor’s or doorman’s work, on the other hand, need not require an advanced degree but the work cannot relocate offshore because proximity to the maintained facility is indispensable.

As these examples suggest, the standard view that globalisation shifts labour demand towards skilled workers and contributes to an increased skill premium in developed countries fails to capture the full picture. The dynamics underlying offshoring are far more complicated, as my recent research with Karolina Ekholm (Stockholm University and Riksbanken, Sweden’s central bank) and Marc Muendler (University of California San Diego) shows.

Our work examines the growing practice of offshoring by looking closely at the nature of the skills and tasks that define the jobs most likely to go abroad – or remain at home. Our research relies on data regarding workforce skills and occupations at the plant level from German Multinational Enterprises (MNEs) during a period of rapid expanding foreign operations, 1998-2001. During this period, overall offshore employment at German multinationals increased by 3.9 per cent in manufacturing and 9 per cent in services.

Our analysis of offshoring examined its effects on the workforce by looking at the underlying tasks of jobs. We sort these tasks into distinct categories: interactive vs. non-interactive, and routine vs. nonroutine. We then compute the wage bill share, to show how much money the company invests in the people needed to accomplish the tasks in these paths.

We find that firms employing more workers abroad over time shift their domestic labour demand towards interactive and non-routine tasks. Non-routine tasks often require a high degree of problem-solving skills.

We usually think of these kinds of tasks and skills as going hand-in-hand with jobs that require high levels of education. However, such tasks and skills don’t necessarily coincide with education levels. For instance, interactive tasks could be essential for a doctor’s job – or for the worker operating a till, or for a waiter. These kinds of jobs demand frequent face-to-face interaction with local co-workers, suppliers or customers, and, thus, proximity and interpersonal skills are essential.

In the same way, jobs that require problemsolving and non-routine tasks could include a business manager or consultant, both requiring high levels of education, but they also could encompass the work of a personal assistant with lower education levels who must quickly respond to the non-routine requests of a busy manager.

Offshoring seems to account for some, but not all, of the changes in the workforce composition at home. We find that offshoring is most strongly associated with a shift towards non-routine tasks in manufacturing, accounting for 14 per cent of the total change, and a shift towards interactive tasks in services, accounting for 17 per cent of the total change.

Offshoring matters for the composition of skills too, but considerably less. It explains about 10 per cent of the increase in the wage-bill share of workers with at least upper-secondary education in manufacturing as well as services and about 11 per cent of the increase in the wage-bill share of white-collar workers in manufacturing. Offshoring to low-income countries — with the exception of Central and Eastern European countries — is associated with stronger onshore responses.

Our examination of the tasks involved at work does not completely explain the reason that MNEs with offshore operations invest more on highly educated workers at home. In other words, although looking at relevant tasks opens up a new dimension for understanding offshoring, our findings also underscore the importance of good old education

Technology is certainly a force in these shifts. Some jobs that are going overseas rely on tasks that can be done remotely thanks to technological advances that could not have been foreseen years ago. It is impossible to predict what new technologies will make the conditions ripe for offshoring, and which domestic workers’ jobs will be lost. The findings suggest that policymakers should strive to create educational systems that are flexible enough to adjust to changing workplace needs, and to set up conditions that create opportunities for life-long learning. In this way, when international competition leads to more offshoring to take advantage of lower labour costs, employment effects can be mitigated through education investments and vocational training.