International outsourcing has had a strongly negative impact on the demand
for unskilled labour in the UK. At the same time, skilled workers are more in
demand because of technological change. These are the central findings of
new research by Alexander Hijzen, Holger Görg and Bob Hine of
Nottingham University, published in the October 2005 issue of the Economic
Journal.
Both the UK and the United States have witnessed a sharp rise in the demand
for skilled workers relative to that of unskilled workers over the past two
decades. This is reflected in a steady increase in the wage gap between
skilled and unskilled workers.
The two main explanations for this phenomenon revolve around the role of
technological change (think of the increased use of computers) and
globalisation. There is a growing consensus among academics that
technology is the key factor driving these changes in the structure of labour
demand, while the impact of globalisation is thought to be small if positive at
all.
But many observers within and outside academia have remained sceptical
about this ‘consensus’ view. The reluctance to accept the consensus is
probably most clearly illustrated in the media. For example, a recent article in
The Guardian attributes the loss of competitiveness of manufacturing
industries in the UK to cheap labour competition from Asia (‘Manufacturing
investment slumps’, 25 February 2003).
Many manufacturing firms have reacted to international wage differentials by
shifting production activities abroad (outsourcing). Recent examples in the UK
include:
‘Dyson, champion of British industry, switches production to Far East’,
The Guardian, 6 February 6 2002: Surprise decision to shed 800 jobs
angers unions and shocks ministers...
‘On your bike Raleigh move to the Far East costs 280 jobs’, The
Guardian, 29 Nov 2002: Bicycle maker Raleigh yesterday closed its
production line in Nottingham...
‘Speedo Shifts Production from Britain to China, Sri Lanka’ Daily Mail, 30
January 2003
Such events constitute radical cuts in the employment of particularly unskilled
workers. It seems hard to believe that massive lay-offs such as these
occurring within a similar region and in a short period of time do not have
important consequences for the demand for workers with different levels of
education and experience.
The anecdotal evidence is supported by the stylised facts presented in this
study. Hijzen, Gorg and Hine show that total international outsourcing in the
UK (measured as imports of intermediates in terms of value added) increased
from 33% in 1984 to 40% in 1995, while outsourcing within the same industry
increased from 11% to 16%. Moreover, the importance of outsourcing
accelerated during the 1990s.
The researchers go on examine the effects of international outsourcing on the
demand for three types of labour in the UK. The results show that
international outsourcing has had a strongly negative impact on the demand
for unskilled labour. R&D (research and development) activity, on the other
hand, appears to have increased the demand for skilled labour, as has been
found in other studies.
Hence, both international outsourcing and technological change induced
through R&D are important explanations of the changing skill structure of UK
manufacturing industries. This confirms that globalisation should be
considered a key driving force alongside technological change behind
changes in the skill structure of labour demand.
The key feature that distinguishes the current wave of globalisation from
previous periods of relative openness is the increasing importance of
international production networks. Developments in communication and
transport technology have made outsourcing a major strategy to restore the
competitiveness of manufacturing firms in developed countries. Most research
on globalisation and labour markets has not captured this distinctive feature of
the current wave of globalisation.
ENDS
Notes for editors: ‘International Outsourcing and the Skill Structure of Labour
Demand in the United Kingdom’ by Alexander Hijzen, Holger Görg and Bob
Hine is published in the October 2005 issue of the Economic Journal.
The authors are at the Leverhulme Centre for Research on Globalisation and
Economic Policy at the University of Nottingham.
For further information: contact Holger Görg on 0115-846-6393 (email:
holger.gorg@nottingham.ac.uk); Alexander Hijzen on 0115-846-6447 (email:
alexander.hijzen@nottingham.ac.uk); or RES Media Consultant Romesh
Vaitilingam on 0117-983-9770 or 07768-661095 (email:
romesh@compuserve.com).