Offshoring and employment structure in the EU periphery: the case of Spain

ABSTRACT

The effects of offshoring of production have received a great deal of interest due to their implications on labour markets. However, the main theoretical predictions related to this issue are not always fulfilled in the empirical analysis; according to the Stolper–Samuelson theorem, there seems to be unanimous support for its effects in advanced countries whose production is relocated but not at all for recipient economies of the same. Additionally, there is a lack of empirical evidence in countries specialized in unskilled-labour tasks which are, at the same time, economies with higher relative wages in a global framework such as the Spanish economy. In this sense, the aim of this article is to analyse the effects of material offshoring in the relative composition of employment in the Spanish manufacturing industry during the period 1990–2007. Furthermore, we investigate the effects of immigrant labour and the temporary employment rate due to its increasing relevance in the Spanish economy during the period analysed. Using a generalized methods of moments (GMM) approach, our results suggest that, as opposed to most developed countries, offshoring in Spain has favoured the demand for blue-collar workers. In addition, we confirm that the increase in immigration and the increasing use of temporary contracts have enlarged the share of low-skilled workers.

KEYWORDS:

• Offshoring
• manufacturing industries
• relative demand for labour
• Spanish economy

JEL CLASSIFICATION:

• F10
• F14
• J40

Acknowledgement

We wish to thank Prof. Carmen Díaz-Mora and Carlos Álvarez for their useful comments that greatly improved this article.

Notes

¹ Central empirical studies are Feenstra and Hanson (1996a, 1996b) for the USA, Helg and Tajoli (2005) for Italy, Strauss-Kahn (2004) for France, Hijzen, Gorg, and Hine (2005) for the United Kingdom, Dell’mour et al. (2000) for Austria and Geishecker (2006) for Germany, among others.

² The offshoring measures differ from the one originally proposed by Feenstra and Hanson: the share of intermediate inputs that are imported. Offshoring strategy should take into account two facts. On the one hand, the increase in the share of imported intermediate inputs over the total intermediary inputs, but also the increase of imported intermediate inputs due to changes in the source of supply resulting from the replace of domestic for imported intermediate inputs. As Hijzen, Gorg, and Hine (2005) pointed out, the share of imported intermediate inputs in relation to the total value of the industry’s production ‘captures the essence of offshoring, i.e. a firm’s decision to substitute domestic value-added by foreign production’.

³ The broad definition, also propose by the authors, includes imported nonenergy intermediate inputs from all industries. The authors argue that the narrow definition is preferred to a broader one since the former is closer to the concept of fragmentation within industries. It has been widely documented that the increase in the relative demand for skilled labour occurred largely within industries. In order to analyse the sources of changes in the relative composition of employment, one should concentrate on factors that change relative factor demand within industries. This is exactly what the narrow definition of outsourcing does, while it is not obscured by shifts between domestic and foreign suppliers. Lorentowicz, Marin, and Rauold (2005) also preferred the narrow definition among others. This choice is driven by the consideration that workers in a particular sector are affected only by decisions that regard the goods produced in their sector.

⁴ Note that Equation 3 already imposed homogeneity and symmetry restrictions, as is standard in the translog case.

⁵ A detailed derivation of this equation is shown in Feenstra and Hanson (2003).

⁶ Peri and Sparber (2009) showed theoretically that immigrants with little educational attainment have a comparative advantage in manual-intensive and simple tasks due to their imperfect knowledge of language and local norms and a comparative disadvantage in communication-intensive and interactive tasks.

⁷ Murat and Paba (2004) also drew attention to some possible interactions between offshoring and the flows of migration. They find that while most developed economies are gradually involved in offshoring activities, many small and medium Italian export firms are increasingly employing low-skilled immigrant labour. In a recent study, Beverelli and Orefice (2012) analysed the effects of migration and offshoring costs on employment levels of migrant workers and offshore workers; they find significant domestic spillover effects alternatively, by reducing the number of migrant workers directly, or providing incentives for firms to source labour abroad via offshoring.

⁸ From a theoretical point of view, Orefice (2014) showed that the optimal choice for firms between offshoring and hiring immigrant workers, in conditions of asymmetric information about ability and effort in production, is to produce low quality products by offshoring production abroad while intermediate quality products are more likely to produce at home using foreign born workers.

⁹ Crinò (2009) reviewed the empirical literature on the effect of offshoring by distinguishing between economies with flexibility and rigidity in the labour market. According to OECD data on Employment Protection Legislation, the countries with the lowest level of labour rigidity are the USA, the United Kingdom and Canada, therefore their labour markets can be considered flexible; as opposed to most European economies with rigid labour markets, which include Portugal, Spain and France.

¹⁰ This result is contrary to those presented by Minondo and Rubert (2006), the only estimation of the effects of offshoring on relative employment composition for the Spanish industry. Nevertheless, we should point out the different period of analysis, 1986–1994, and the fact that the authors consider qualifications rather than job categories when distinguishing between the groups of workers affected by offshoring.

¹¹ Aubert and Sillard (2005) found that the Spanish economy ranks among the top destinations for offshoring strategies in the French economy from 1995 to 2001, mainly in activities such as motor vehicles, chemistry, rubber and plastic, food, and electric and electronic components.

Additional information

Funding

This study is part of a research project financed by the Consejería de Educación y Ciencia of the Junta de Comunidades de Castilla-La Mancha [PPII10-0154-9251] and has been part-funded by the European Regional Development Fund (ERDF).