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Offshoring, Labour Market Institutions and the Elasticity of Labour Demand

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  • Alexander Hijzen
  • Paul Swaim

Abstract

This paper analyses the evolution of the elasticity of labour demand and the role of offshoring therein using industry-level data for a large number of OECD countries. The first main finding is that the wage elasticity of labour demand has increased substantially. The finding that employment has become increasingly sensitivity to wages is shown to be robust to a wide variety of econometric specifications of labour demand, although some of this association may reflect a trend increase in the speed of adjustment rather than an increase in the long-run wage elasticity. A second finding is that more intensive offshoring is associated with more elastic labour demand, consistent with increased offshoring having expanded the flexibility of firms to adjust the mix of domestic workers and foreign value-added in production when relative factor prices change. More in particular, the average elasticity of labour demand appears to be about 30% to 40% larger in absolute value than the counter-factual elasticity which would have prevailed had offshoring not been possible. Increases of this magnitude might well have important implications for job security and worker bargaining power. Finally, we find some evidence that strict employment protection legislation weakens the link between offshoring and higher labour demand elasticity. This suggests that the impact of offshoring on labour demand elasticity depends on the national institutional environment.

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Bibliographic Info

Paper provided by University of Nottingham, GEP in its series Discussion Papers with number 08/05.

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Handle: RePEc:not:notgep:08/05

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Keywords: Employment protection legislation; international outsourcing; labour demand; worker insecurity;

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References

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Cited by:
  1. Lichter, Andreas & Peichl, Andreas & Siegloch, Sebastian, 2014. "The Own-Wage Elasticity of Labor Demand: A Meta-Regression Analysis," IZA Discussion Papers 7958, Institute for the Study of Labor (IZA).
  2. Senses, Mine Zeynep, 2010. "The effects of offshoring on the elasticity of labor demand," Journal of International Economics, Elsevier, vol. 81(1), pages 89-98, May.
  3. Neil Foster-McGregor & Johannes Pöschl & Robert Stehrer, 2012. "Offshoring and the Elasticity of Labour Demand," wiiw Working Papers 90, The Vienna Institute for International Economic Studies, wiiw.
  4. Andreas Lichter & Andreas Peichl & Sebastian Siegloch, 2014. "Exporting and Labor Demand: Micro-level Evidence from Germany," CESifo Working Paper Series 4668, CESifo Group Munich.
  5. Jaanika Meriküll & Tairi Rõõm, . "Are foreign-owned firms different ? Comparision of employment volatility and elasticity of labour demand," Bank of Estonia Working Papers wp2014-1, Bank of Estonia.
  6. Torben M. Andersen & Allan Sørensen, 2008. "Globalisation squeezes the public sector - is it so obvious?," Economics Working Papers 2008-08, School of Economics and Management, University of Aarhus.

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