Significant Impact on Worker Wages from Offshoring

In a new working paper, Estimating the Impact of Trade and Offshoring on American Workers Using the Current Population Surveys, authors Avraham Ebenstein, Ann Harrison, Margaret McMillan, and Shannon Phillips demonstrate that previous research into the relatively benign effects of outsourcing and offshoring were masking the true nature of the impact. By studying the impact across sectors rather than within sectors, the authors identify a significant negative impact on worker's wages, especially those who are forced to move from the manufacturing sector into the service sector. While this should come as no surprise to anyone, these data provide concrete evidence of that impact.

We then examine the mechanisms behind the contrast between the small positive wage effects of globalization within manufacturing and the relatively large negative wage effects we observe at the occupational level. We begin by showing that trade and offshoring are associated with a contraction in the manufacturing workforce. Then, using a large panel of CPS workers who are matched across surveys, we demonstrate that workers who switch industries within manufacturing experience almost no decline in wages. However, when workers relocate to the service sector, they experience a significant wage loss. The negative wage impact is particularly large among displaced workers who also switch occupations. We estimate wage losses of 2 to 4 percent among workers leaving manufacturing and an additional 4 to 11 percent wage loss among workers who also switch occupations. These effects are most pronounced for workers who perform routine tasks. This downward pressure on wages due to import competition and offshoring has been overlooked because it operates between and not within sectors.

This provides compelling evidence that the negative consequence of trade on workers is mediated through a reallocation of labor across sectors and into different occupations. While many models of trade posit that workers can move in a costless manner to new jobs in the face of pressure from foreign labor, we identify large and significant wage declines among workers forced to leave manufacturing, and the wage decline is particularly pronounced for those who are forced to switch occupations.

With the recent reports of slowdowns in the remaining manufacturing base, this effect will only get worse.