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The effects of offshoring on wages: a meta-analysis

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Abstract

Offshoring, either as FDI or offshore outsourcing, is a phenomenon of increasing importance that has been widely studied in the economics literature. Studies analysing the impact of offshoring on the labour market report divergent results. In this paper we develop a meta-analysis of the empirical literature that estimates the effect of offshoring on wages. We find that, after correcting for the presence of publication bias, the average effect is not significantly different from zero in either the origin or the destination countries. We also find that the wage impact of offshoring depends on methodological characteristics of the primary studies, such as the way offshoring is measured, the nature of goods/services that are offshored, the workers’ skill level, the unit of analysis, the structure of the data, and the estimation technique.

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Notes

  1. Other branches of the literature have examined the impacts of offshoring in other dimensions of the labour market, such as: employment (e.g., Amiti and Wei 2009a, b; Ottaviano et al. 2013; Mion and Zhu 2013; Antràs et al. 2017), occupations (e.g., Liu and Treffler 2008; Crinò 2010; Criscuolo and Garicano 2010; Becker et al. 2013; Ebestein et al. 2014); and displacement (e.g., Geishecker 2008; Egger et al. 2007; Autor et al. 2014; Hummels et al. 2014).

  2. Although the term “offshoring” generally implies the idea of relocation of company activities abroad, the literature is not always convergent when defining it. Venkatraman (2004), for example, defines offshoring as the search for lower costs without sacrificing quality significantly. Erber and Sayed-Ahmed (2005) describe it as the relocation of company activities to countries where costs are lower. Both definitions treat offshoring solely in its FDI modality, by declaring that the “mother” company performs the investment entirely abroad. However, offshoring can also be seen in a broader perspective—as “the splitting up of the production process into many separate activities and the shift of some of these activities abroad” (Michel and Rycx 2012, p. 230), regardless of whether these are internalized or not (Niederman et al. 2007; Crino, 2009; Neureiter and Nunnenkamp 2010). In this case, offshoring can involve both FDI (when it refers to an internalized activity, carried by the subsidiary of a company) and international outsourcing (when it refers to an activity carried by the intermediary of a company or local subsidiary of a multinational company, that is not the company itself).

  3. We note that the origin country is the country where the firms that outsource their tasks (i.e.., the firms that import the intermediate inputs) are located.

  4. We note that the destination country is the country to which the task/job is relocated.

  5. This set of studies typically regress wage inequality on offshoring. Therefore, they cannot be mixed with the papers that regress the wage levels on offshoring, as both types of studies estimate the offshoring effects on variables with different natures.

  6. We should note that here the terms “fixed effects” and “random effects” do not refer to the common panel data estimation techniques. In the context of meta-analysis, they refer to specific methods of computing the average effect size.

  7. We are aware that the number of observations in the subsample of studies that estimate the wage effect of offshoring in the destination country is considerably lower. Still, we also perform the analysis of this subset of studies, as it allows having a richer, more comprehensive view of the phenomenon.

  8. The table does not report the results of the WAAP for the origin country, since none of the primary estimates has the adequate power. This is probably due to the fact that, as shown above, the average effect of offshoring on wages is very small, in which case studies will necessarily have a low power (Ioannidis et al. 2017). Quite surprisingly, around 20% of the areas of empirical economics do not contain a single estimate with an adequate power (Ioannidis et al. 2017).

  9. We do not account for differences regarding the development level of the countries of offshoring origin, as in almost all the papers the origin of offshoring is in developed countries.

  10. We use only the results of the estimations of the specific regressions and of the BMA method, because these are more reliable than the results of the general regression, which suffer from multicollinearity and model uncertainty.

  11. To compute the best-practice estimate for the destination country, we use the same values for the moderator variables as in the case of the origin country, with the exception of variable ImpIG (given that most of the primary studies examine the effect of offshoring in the destination country in its FDI modality).

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Funding

This paper is financed by National Funds of the FCT - Portuguese Foundation for Science and Technology within the projects UIDB/04007/2020, UIDB/04105/2020, UIDP/04105/2020, and UIDB/04630/2020.

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Authors and Affiliations

  1. Faculdade de Economia, Universidade do Porto, Porto, Portugal

    Matilde Cardoso

  2. Department of Management and Economics, Universidade da Beira Interior, and CEFAGE-UBI, Covilhã, Portugal

    Pedro Cunha Neves

  3. Faculdade de Economia, Universidade do Porto, and CEFUP, Porto, Portugal

    Oscar Afonso

  4. Department of Management and Economics, Universidade da Beira Interior, NECE, and NIPE, Covilhã, Braga, Portugal

    Elena Sochirca

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  1. Matilde Cardoso
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Cardoso, M., Neves, P.C., Afonso, O. et al. The effects of offshoring on wages: a meta-analysis. Rev World Econ 157, 149–179 (2021). https://doi.org/10.1007/s10290-020-00385-z

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