The effects of offshoring on wages: a meta-analysis

Abstract

Offshoring, either as FDI or offshore outsourcing, is a phenomenon of increasing importance that has been widely studied in the economics literature. Studies analysing the impact of offshoring on the labour market report divergent results. In this paper we develop a meta-analysis of the empirical literature that estimates the effect of offshoring on wages. We find that, after correcting for the presence of publication bias, the average effect is not significantly different from zero in either the origin or the destination countries. We also find that the wage impact of offshoring depends on methodological characteristics of the primary studies, such as the way offshoring is measured, the nature of goods/services that are offshored, the workers’ skill level, the unit of analysis, the structure of the data, and the estimation technique.

This is a preview of subscription content, log in to check access.

Fig. 1

Notes

  1. 1.

    Other branches of the literature have examined the impacts of offshoring in other dimensions of the labour market, such as: employment (e.g., Amiti and Wei 2009a, b; Ottaviano et al. 2013; Mion and Zhu 2013; Antràs et al. 2017), occupations (e.g., Liu and Treffler 2008; Crinò 2010; Criscuolo and Garicano 2010; Becker et al. 2013; Ebestein et al. 2014); and displacement (e.g., Geishecker 2008; Egger et al. 2007; Autor et al. 2014; Hummels et al. 2014).

  2. 2.

    Although the term “offshoring” generally implies the idea of relocation of company activities abroad, the literature is not always convergent when defining it. Venkatraman (2004), for example, defines offshoring as the search for lower costs without sacrificing quality significantly. Erber and Sayed-Ahmed (2005) describe it as the relocation of company activities to countries where costs are lower. Both definitions treat offshoring solely in its FDI modality, by declaring that the “mother” company performs the investment entirely abroad. However, offshoring can also be seen in a broader perspective—as “the splitting up of the production process into many separate activities and the shift of some of these activities abroad” (Michel and Rycx 2012, p. 230), regardless of whether these are internalized or not (Niederman et al. 2007; Crino, 2009; Neureiter and Nunnenkamp 2010). In this case, offshoring can involve both FDI (when it refers to an internalized activity, carried by the subsidiary of a company) and international outsourcing (when it refers to an activity carried by the intermediary of a company or local subsidiary of a multinational company, that is not the company itself).

  3. 3.

    We note that the origin country is the country where the firms that outsource their tasks (i.e.., the firms that import the intermediate inputs) are located.

  4. 4.

    We note that the destination country is the country to which the task/job is relocated.

  5. 5.

    This set of studies typically regress wage inequality on offshoring. Therefore, they cannot be mixed with the papers that regress the wage levels on offshoring, as both types of studies estimate the offshoring effects on variables with different natures.

  6. 6.

    We should note that here the terms “fixed effects” and “random effects” do not refer to the common panel data estimation techniques. In the context of meta-analysis, they refer to specific methods of computing the average effect size.

  7. 7.

    We are aware that the number of observations in the subsample of studies that estimate the wage effect of offshoring in the destination country is considerably lower. Still, we also perform the analysis of this subset of studies, as it allows having a richer, more comprehensive view of the phenomenon.

  8. 8.

    The table does not report the results of the WAAP for the origin country, since none of the primary estimates has the adequate power. This is probably due to the fact that, as shown above, the average effect of offshoring on wages is very small, in which case studies will necessarily have a low power (Ioannidis et al. 2017). Quite surprisingly, around 20% of the areas of empirical economics do not contain a single estimate with an adequate power (Ioannidis et al. 2017).

  9. 9.

    We do not account for differences regarding the development level of the countries of offshoring origin, as in almost all the papers the origin of offshoring is in developed countries.

  10. 10.

    We use only the results of the estimations of the specific regressions and of the BMA method, because these are more reliable than the results of the general regression, which suffer from multicollinearity and model uncertainty.

  11. 11.

    To compute the best-practice estimate for the destination country, we use the same values for the moderator variables as in the case of the origin country, with the exception of variable ImpIG (given that most of the primary studies examine the effect of offshoring in the destination country in its FDI modality).

References

  1. Acemoglu, D., Gancia, G., & Zilibotti, F. (2015). Offshoring and directed technical change. American Economic Journal: Macroeconomics,7(3), 84–122.

    Google Scholar 

  2. Amiti, M., & Wei, S. J. (2009a). Does service offshoring lead to job losses? Evidence from the United States. In M. Reinsdorf & M. J. Slaughter (Eds.), International trade in services and intangibles in the era of globalization (pp. 227–243). Chicago: University of Chicago Press.

    Google Scholar 

  3. Amiti, M., & Wei, S. J. (2009b). Service offshoring and productivity: Evidence from de US. The World Economy,32(2), 203–220.

    Google Scholar 

  4. Anderson, E., d’Orey, M. A. J., Duvendack, M., & Esposito, L. (2018). Does government spending affect income poverty? A meta-regression analysis. World Development,103, 60–71.

    Google Scholar 

  5. Andrews, I., & Kasy, M. (2019). Identification of and correction for publication bias. American Economic Review,109(8), 2766–2794.

    Google Scholar 

  6. Antràs, P., Garicano, L., & Rossi-Hansberg, E. (2006). Offshoring in a knowledge economy. Quarterly Journal of Economics,121(1), 31–77.

    Google Scholar 

  7. Autor, D. H., Dorn, D., Hanson, G. H., & Song, J. (2014). Trade adjustment: Worker level evidence. Quarterly Journal of Economics,129, 1799–1860.

    Google Scholar 

  8. Baumgarten, D., Geishecker, I., & Görg, H. (2013). Offshoring, tasks, and the skill-wage pattern. European Economic Review,61, 132–152.

    Google Scholar 

  9. Becker, S. O., Ekholm, K., & Muendler, M. (2013). Offshoring and the onshore composition of tasks and skills. Journal of International Economics,90, 91–106.

    Google Scholar 

  10. Bogliacino, F., Guarascio, D., & Cirillo, V. (2018). The dynamics of profits and wages: Technology, offshoring and demand. Industry and Innovation,25(8), 778–808.

    Google Scholar 

  11. Bom, P., & Rachinger, H. (2019). A kinked meta-regression model for publication bias correction. Research Synthesis Methods,10(4), 497–514.

    Google Scholar 

  12. Bound, J., & Johnson, G. (1992). Changes in the structure of wages in the 1980’s: An evaluation of alternative explanations. American Economic Review,82(3), 371–392.

    Google Scholar 

  13. Cameron, A. C., Gelbach, J. B., & Douglas, L. M. (2008). Bootstrap-based improvements for inference with clustered errors. Review of World Economics and Statistics,90(3), 414–427.

    Google Scholar 

  14. Card, D., Kluve, J., & Weber, A. (2018). What works? A meta-analysis of recent active labor market program evaluations. Journal of the European Economic Association,16(3), 894–931.

    Google Scholar 

  15. Chen, Z., Ge, Y., & Huiwen, L. (2011). Foreign direct investment and wage inequality: Evidence from China. World Development,39(8), 1322–1332.

    Google Scholar 

  16. Crinò, R. (2009). Offshoring, multinationals and labour market: A review of the empirical literature. Journal of Economic Surveys,23(2), 197–249.

    Google Scholar 

  17. Crinò, R. (2010). Service offshoring and white-collar employment. Review of Economic Studies,77, 595–632.

    Google Scholar 

  18. Criscuolo, C., & Garicano, L. (2010). Offshoring and wage inequality: Using occupational licensing as a shifter of Offshoring costs. American Economic Review,100(2), 439–443.

    Google Scholar 

  19. Damijan, J. P., & Kostevc, C. (2011). Trade liberalisation and economic geography in CEE countries: The role of FDI in the adjustment pattern of regional wages. Post-Communist Economies,23(02), 163–189.

    Google Scholar 

  20. Dominicis, L., Florax, R. J., & De Groot, H. L. (2008). A meta-analysis on the relationship between income inequality and economic growth. Scottish Journal of Political Economy,55(5), 654–682.

    Google Scholar 

  21. Doucouliagos, C. (2005). Publication bias in the economic freedom and economic growth literature. Journal of Economic Surveys,19(3), 367–387.

    Google Scholar 

  22. Doucouliagos, C., & Laroche, P. (2009). Unions and profits: A meta-regression analysis. Industrial Relations,48(1), 146–184.

    Google Scholar 

  23. Doucouliagos, C. (2011). How large is large? Preliminary and relative guidelines for interpreting partial correlations in economics. Economics series working paper 05, Deakin University.

  24. Ebenstein, A., Harrison, A., McMillan, M., & Phillips, S. (2014). Estimating the impact of trade and offshoring on American workers using the current population surveys. Review of Economics and Statistics,96(4), 581–595.

    Google Scholar 

  25. Egger, H., & Egger, P. (2002). How international outsourcing drives up Eastern European wages. Weltwirtschaftliches Archiv/Review of World Economics,138(1), 83–96.

    Google Scholar 

  26. Egger, P., Pfaffermayr, M., & Weber, A. (2007). Sectoral adjustment of employment to shifts in outsourcing and trade: Evidence from a dynamic fixed effects multinomial logit model. Journal of Applied Econometrics,22, 559–580.

    Google Scholar 

  27. Egger, P., Pfaffermayr, M., & Wolfmayr-Schnitzer, Y. (2001). The international fragmentation of Austrian manufacturing: The effects of outsourcing on productivity and wages. North American Journal of Economics and Finance,12, 257–272.

    Google Scholar 

  28. Egger, M., Smith, G., Schneider, M., & Minder, C. (1997). Bias in meta-analysis detected by a simple graphical test. BMJ: British Medical Journal,316, 629–634.

    Google Scholar 

  29. Erber, G., & Sayed-Ahmed, A. (2005). Offshore outsourcing. A global shift in the present IT Industry. Intereconomics,40(2), 100–112.

    Google Scholar 

  30. Farrell, D., Laboissière, M. A., & Rosenfeld, J. (2006). Sizing the emerging global labor market. Academy of Management Perspectives, 20, 23–34.

    Google Scholar 

  31. Feenstra, R. C., & Hanson, G. H. (1996). Foreign investment, outsourcing and relative wages. In R. C. Feenstra, G. M. Grossman, & D. A. Irwin (Eds.), Political economy of trade policy: Essays in honor of Jagdish Bhagwati. Cambridge: MIT Press.

    Google Scholar 

  32. Feenstra, R. C., & Hanson, G. H. (1997). Foreign direct investment and relative wages: Evidence from Mexico’s maquiladoras. Journal of International Economics,42(3–4), 371–393.

    Google Scholar 

  33. Feenstra, R. C., & Hanson, G. H. (1999). The impact of outsourcing and high-technology capital on wages: Estimates for the United States, 1979–1990. Quarterly Journal of Economics,114, 907–940.

    Google Scholar 

  34. Forza, C., & Di Nuzzo, F. (1998). Meta-analysis applied to operations management: Summarizing the results of empirical research. International Journal of Production Research,36(3), 837–861.

    Google Scholar 

  35. Furukawa, C. (2019). Publication bias under aggregation frictions: Theory, evidence, and a new correction method. SSRN Electronic Journal.

  36. Gancia, G., & Bonfiglioli, A. (2008). North-South trade and directed technical change. Journal of International Economics,76(2), 276–295.

    Google Scholar 

  37. Geishecker, I. (2008). The impact of international outsourcing on individual employment security: A micro-level analysis. Labour Economics,15, 291–314.

    Google Scholar 

  38. Geishecker, I., & Görg, H. (2008). Winners and losers: A micro-level analysis of international outsourcing and wages. Canadian Journal of Economics,41(1), 243–270.

    Google Scholar 

  39. Geishecker, I., & Görg, H. (2013). Services, offshoring and wages: Evidence from micro data. Oxford Economic Papers,65(1), 124–146.

    Google Scholar 

  40. Geishecker, I., Görg, H., & Munch, J. R. (2010). Do labour market institutions matter? Micro-level wage effects of international outsourcing in three European countries. Review of World Economics,146(1), 179–198.

    Google Scholar 

  41. Goel, M. (2017). Offshoring—Effects on technology and implications for the labor market. European Economic Review,98, 217–239.

    Google Scholar 

  42. Görg, H., & Görlich, D. (2015). Offshoring, wages and job security of temporary workers. Review of World Economics,151(3), 533–554.

    Google Scholar 

  43. Greenland, S., & O’Rourke, K. (2008). Meta-analysis. In K. Rothnan, S. Greenland, & T. Lash (Eds.), Modern epidemiology (pp. 652–682). Philadelphia: Lippincott Williams & Wilkins.

    Google Scholar 

  44. Grossman, G. M., & Rossi-Hansberg, E. (2008). Trading tasks: A simple theory of offshoring. American Economic Review,98(5), 1978–1997.

    Google Scholar 

  45. Havranek, T. (2015). Measuring intertemporal substitution: The importance of method choices and selective reporting. Journal of the European Economic Association,13(6), 1180–1204.

    Google Scholar 

  46. Havranek, T., Hampl, M., & Irsova, Z. (2020). Foreign capital and domestic productivity in the Czech Republic: A meta-regression analysis. Applied Economics, 52 (18), 1949–1958.

  47. Havranek, T., Herman, D., & Irsova, Z. (2018). Does daylight saving save electricity? A meta-analysis. The Energy Journal,39(2), 35–61.

    Google Scholar 

  48. Havranek, T., Horvath, R., Irsova, Z., & Rusnak, M. (2015). Cross-country heterogeneity in intertemporal substitution. Journal of International Economics,96(1), 100–118.

    Google Scholar 

  49. Havranek, T., Rusnak, M., & Sokolova, A. (2017). Habit formation in consumption: A meta-analysis. European Economic Review,95, 142–167.

    Google Scholar 

  50. Havranek, T., & Sokolova, A. (2020). Do consumers really follow a rule of thumb? Three thousand estimates from 144 studies say `Probably Not’. Review of Economic Dynamics,35(1), 97–122.

    Google Scholar 

  51. Hedges, L., & Olkin, I. (1985). Statistical methods for meta-analysis. New York: Academic Press.

    Google Scholar 

  52. Hsieh, C. T., & Woo, K. T. (2005). The impact of outsourcing to China on Hong Kong’s labor market. American Economic Review,95(5), 1673–1687.

    Google Scholar 

  53. Hummels, D., Jørgensen, R., Munch, J., & Xiang, C. (2014). The wage and employment effects of outsourcing: Evidence from Danish matched worker-firm data. American Economic Review,104(6), 1597–1629.

    Google Scholar 

  54. Hummels, D., Munch, J., & Xiang, C. (2018). Offshoring and labour markets. Journal of Economic Literature,56(3), 981–1028.

    Google Scholar 

  55. Ioannidis, J. P., Stanley, T. D., & Doucouliagos, H. (2017). The power of bias in economics research. The Economic Journal,127, 236–265.

    Google Scholar 

  56. Kamal, F., & Lovely, M. E. (2017). Import competition from and offshoring to low-income countries: Implications for employment and wages at U.S. domestic manufacturers. Journal of Asian Economics,48, 100–119.

    Google Scholar 

  57. Kass, R. E., & Raftery, A. (1995). Bayes factors. Journal of the American Statistical Association,90(430), 773–795.

    Google Scholar 

  58. Katz, L. F., & Murphy, K. M. (1992). Changes in relative wages, 1963–1987: Supply and demand factors. The Quarterly Journal of Economics,107(1), 35–78.

    Google Scholar 

  59. Kim, S., & Hwang, J. (2016). Offshoring, wages and heterogeneity. Japan and the World Eonomy,37–38, 65–72.

    Google Scholar 

  60. Kramarz, F. (2008). Offshoring, wages and employment: Evidence from data matching imports, firms and workers. In L. Fontagné & A. Harrison (Eds.), The factory-free economy. Oxford: Oxford University Press.

    Google Scholar 

  61. Lee, H., & Lee, J. (2015). The impact of offshoring on temporary workers: Evidence on wages from South Korea. Review of World Economics,151(3), 555–587.

    Google Scholar 

  62. Lipsey, R. E., & Sjoholm, F. (2004). FDI and wage spillovers in Indonesian manufacturing. Review of World Economics,140, 321–332.

    Google Scholar 

  63. Liu, R. & Trefler, D. (2008). Much Ado About Nothing: American Jobs and the Rise of Service Outsourcing to China and India (NBER working paper 14061).

  64. Liu, M., Xu, L., & Liu, L. (2004). Wage-related labour standards and FDI in China: Some survey findings from Guangdong Province. Pacific Economic Review,9(3), 225–243.

    Google Scholar 

  65. Mancher, M., Lowes, P., Tarsh, S., & Ahn, C. (2014). Deloitte’s 2014 global outsourcing and insourcing survey. Deloitte: LLP.

    Google Scholar 

  66. Martins, P. S., & Opromolla, L. D. (2009). Exports, imports and wages: Evidence from matched firm-worker-product panels (IZA Discussion Paper No. 4646).

  67. Michel, B., & Rycx, F. (2012). Does offshoring of materials and business services affect employment? Evidence from a small open economy. Applied Economics,44(2), 229–251.

    Google Scholar 

  68. Mion, G., & Zhu, L. (2013). Import competition from and offshoring to China: A curse or blessing for firms? Journal of International Economics,89, 202–215.

    Google Scholar 

  69. Munch, J. R., & Skaksen, J. R. (2009). Specialization, outsourcing and wages. Review of World Economics,145, 57–73.

    Google Scholar 

  70. Nelson, J., & Kennedy, P. (2009). The use (and abuse) of meta-analysis in environmental and natural resource economics: An assessment. Environmental & Resource Economics,42(3), 345–377.

    Google Scholar 

  71. Neureiter, M., & Nunnenkamp, P. (2010). Outsourcing motives, location choice and labour market implications: An empirical analysis for European Countries. Kyklos,63(2), 206–230.

    Google Scholar 

  72. Neves, P. C., & Sequeira, T. (2018). Spillovers in the production of knowledge: A meta-regression analysis. Research Policy,47(4), 750–767.

    Google Scholar 

  73. Neves, P. C., Silva, S., & Afonso, Ó. (2016). A meta-analytic assessment of the effects of inequality on growth. World Development,78, 386–400.

    Google Scholar 

  74. Niederman, F., Kundu, S., & Salas, S. (2007). IT software development offshoring: A multi-level theoretical framework and research agenda. In Strategic use of information technology for global organizations (pp. 59–84). IGI Global.

  75. Oldenski, L. (2014). Offshoring and the polarization of the U.S. Labour Market. Industrial and Labour Relations Review,67, 734–761.

    Google Scholar 

  76. Olney, W. W. (2012). Offshoring, immigration, and the native wage distribution. The Canadian Journal of Economics,45(3), 830–856.

    Google Scholar 

  77. Ottaviano, G. I. P., Peri, G., & Wright, G. C. (2013). Immigration, offshoring and American Jobs. American Economic Review,103(5), 1925–1959.

    Google Scholar 

  78. Palugod, N., & Palugod, P. A. (2011). Global trends in offshoring and outsorcing. International Journal of Business and Social Science,2(16), 13–19.

    Google Scholar 

  79. Parteka, A., & Wolszczak-Derlacz, J. (2015). Integrated sectors-diversified earnings: the (missing) impact of offshoring on wages and wage convergence in the EU27. The Journal of Economic Inequality,13(3), 325–350.

    Google Scholar 

  80. Raftery, A., Madigan, D., & Hoeting, J. (1997). Bayesian model averaging for linear regression methods. Journal of the American Statistical Association,92(437), 179–191.

    Google Scholar 

  81. Rodriguez-Clare, A. (2010). Offshoring in a Ricardian World. American Economic Journal-Macroeconomics,2(2), 227–258.

    Google Scholar 

  82. Sequeira, T., & Neves, P. C. (2020). Stepping on toes in the production of knowledge: A meta-regression analysis. Applied Economics,52(3), 260–274.

    Google Scholar 

  83. Sethupathy, G. (2013). Offshoring, wages, and employment: Theory and evidence. European Economic Review,62, 73–97.

    Google Scholar 

  84. Sokolova, A., & Sorensen, T. A. (2018). Monopsony in labor markets: A meta-analysis (IZI Discussion Paper No. 11966).

  85. Stanley, T. D. (2005). Beyond publication bias. Journal of Economic Surveys,19(3), 309–345.

    Google Scholar 

  86. Stanley, T. D., Doucouliagos, C., & Jarrell, S. B. (2008). Meta-regression analysis as the socio-economics of economics research. The Journal of Socio-Economics,37(1), 276–292.

    Google Scholar 

  87. Tomohara, A., & Takii, S. (2011). Does globalization benefit developing countries? Effects of FDI on local wages. Journal of Policy Modeling,33(3), 511–521.

    Google Scholar 

  88. Ugur, M. (2014). Corruption’s direct effects on per-capita income growth: A meta-analysis. Journal of Economic Surveys,28(3), 472–490.

    Google Scholar 

  89. Ugur, M., Trushin, E., Solomon, E., & Guidi, F. (2016). R&D and productivity in OECD firms and industries: A hierarchical meta-regression analysis. Research Policy,45, 2069–2086.

    Google Scholar 

  90. Valickova, P., Havranek, T., & Horvath, R. (2015). Financial development and economic growth: A meta-analysis. Journal of Economic Surveys,29(3), 506–526.

    Google Scholar 

  91. Venkatraman, N. V. (2004). Offshoring without guilt. Mit Sloan Management Review,45(3), 14.

    Google Scholar 

  92. Wolszczak-Derlacz, J., & Parteka, A. (2018). The effects of offshoring to low-wage countries on domestic wages: A worldwide industrial analysis. Empirica,45(1), 129–163.

    Google Scholar 

  93. Wood, A. (1994). North-south trade, employment, and inequality. Oxford: Clarendon Press.

    Google Scholar 

Download references

Funding

This paper is financed by National Funds of the FCT - Portuguese Foundation for Science and Technology within the projects UIDB/04007/2020, UIDB/04105/2020, UIDP/04105/2020, and UIDB/04630/2020.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Pedro Cunha Neves.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

About this article

Verify currency and authenticity via CrossMark

Cite this article

Cardoso, M., Neves, P.C., Afonso, O. et al. The effects of offshoring on wages: a meta-analysis. Rev World Econ (2020). https://doi.org/10.1007/s10290-020-00385-z

Download citation

Keywords

  • Offshoring
  • Foreign direct investment
  • Offshore outsourcing
  • Wages
  • Meta-analysis

JEL Classification

  • E24
  • F16
  • F23
  • F66