Review of Industrial Organization 19: 109–120, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
The Impact of Foreign Competition and New
Technologies on the Demand for Heterogeneous
Empirical Evidence from the German Business-Related Services Sector
Centre for European Economic Research, Department of Industrial Economics, L 7, 1, D–68161
Mannheim, Germany and Center of Finance and Econometrics at the University of Konstanz,
Abstract. This paper investigates the impact which foreign competition, investment in information
and communication technologies (ICT) and investment in capital goods other than ICT-related have
on the demand for heterogeneous labor. A dynamic interrelated factor demands model serves as
the theoretical framework and is estimated by an ordered probit model. Cross-sectional data from a
business survey in the service sector are used in the empirical analysis. It turns out that skill-biased
technological change is a determinant of the recent decline in relative demand for low skilled labor
in the business-related services sector. Expected foreign competition positively affects the demand
for unskilled workers and for workers with completed vocational training, while it leaves the demand
for the other skill groups unchanged.
Key words: Foreign competition, interrelated factor demands, ordered probit model, service sector,
skill-biased technological change.
I. Introduction and Brief Overview of Existing Studies
Many developed economies have witnessed a steady decline in the demand for
low skilled workers over the last few years. This decline was even steeper for
Germany than for many other OECD countries.
In 1995, unemployment ﬁgures
for unskilled workers were three times higher than for workers with a completed
Helpful comments from the participants of the XIth CREST–NBER S´eminaire Franco-
Am´ericain on “Information and Communications Technologies, Employment and Earnings” at the
University of Nice-Sophia Antipolis, June 22–23, 1998 and the German Economic Association meet-
ing at Rostock, September 22–25, 1998 are gratefully acknowledged. This paper beneﬁted greatly
from comments made by Bertrand Koebel, François Laisney, Georg Licht, Winfried Pohlmeier and
Viktor Steiner. I am grateful to Thorsten Doherr, Günther Ebling, Norbert Janz and Hiltrud Nigge-
mann for sharing the dataset. The paper also markedly gained greatly from the suggestions I received
from two anonymous referees and the general editor of this journal. This research was partially
funded by the German Science Foundation within the “Industrial Economics and Input Markets”
See OECD (1996) and Papaconstantinou (1997).