Exposure to the new wave of offshoring:
An unemployment perspective
International School of Economics and Management, Capital University of Economics and Business, Beijing, China
Over the past decades, offshoring developed in two main waves.
The first wave was characterised
by material offshoring such as consumer electronics, textiles and apparel, and footwear and leather
Production is simply relocated from high-wage to low-wage countries. The second wave
was characterised by service relocation, the feasibility of which was facilitated by communication
technology improvements. In fact, as the offshoring wave reached offices and white-collar jobs,
“tasks that were previously viewed as non-traded became freely traded. The classic example is the
moving of US call centers to India” (Baldwin, 2006, p. 23). The OECD (2007) reports that ser-
vice-sector outsourcing has showed strong growth in OECD countries since 1995.
Figure 1 shows
this trend for selected countries. At the same time, the scale of manufacturing-sector outsourcing
in those selected OECD countries continued to grow, despite the much lower growth rate.
Economists and politicians agree that the home country can benefit from offshoring activities
by taking advantage of low-cost resources. However, concerns have also been raised regarding its
impact on domestic job security. The issue of whether increasing service relocation will destroy
domestic jobs has become a contentious political issue. Some estimates predict that the service off-
shoring boom will lead to a large number of job losses.
However, until now, there has been no
empirical evidence supporting this argument.
In this paper, we investigate the impact of increasing service relocation due to improvements in
service offshoring technology. We show that its impact on domestic unemployment can be negative,
and we determine the factors contributing to this outcome. We also examine how one sector’s off-
shoring activities impact another’s through the general equilibrium effect, and we show how
See Bottini, Ernst and Luebker (2007) for a review of trends in offshoring.
See Alic and Harris (1986), Magaziner and Patinkin (1989), Yoffie and Cassares (1994), Waldinger (1986) and Gereffi
(1993) for introductions to material offshoring activities.
UNCTAD found that 39% of the top 500 European firms got involved in the offshoring of services (UNCTAD 2004).
In terms of the level of offshoring extent, service offshoring is also large though it is generally lower than that in the man-
ufacturing sector, especially in some European countries. For example, in Belgium, the offshoring extent is 0.21 in the ser-
vice sector and the offshoring extent is 0.38 in the manufacturing sector. Therefore, the growth in service offshoring is
Forrester Research predicts that more than 3 million white-collar jobs will be destroyed due to offshoring activities in the
United States by 2015, and Deloitte Research predicts that 2 million financial-sector jobs will be lost by 2009.
© 2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2018;41:1722–1746.