Unskilled Workers Lose Out When British Industry Moves East

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.

''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.