Offshoring Effects on Workers with Different Types of Contract

by Joon H. Lee,Voxeu.org

Appeared originally at Voxeu.org 20 December 2015

Globalisation in the form of offshoring can impact the domestic labour market. This column investigates how offshoring affects workers based on their contract type. The findings indicate that the wages of South Korean manufacturing workers increase as offshoring increases, but that this impact is significantly weaker for temporary workers. One potential channel for globalisation to exacerbate inequality is therefore the contract type.

One of the most notable phenomena in the globalisation era is the fast growing international trade in intermediate goods, which has outpaced trade in final goods. Another notable characteristic is growing inequality within countries. The wages of skilled workers relative to those of unskilled workers have increased since the early 1980s almost everywhere in the world. Consequently, the public, policymakers, and academics have attempted to understand whether globalisation in the form of intermediate offshoring – or, more broadly, international trade – affects the domestic labour market.

Recent trade literature has documented that globalisation indeed affects domestic labour markets (Autor et al. 2014), and that the impacts depend, among other factors, on the sourcing country’s income level, the education level of domestic workers, and the occupations involved (Ebenstein et al. 2014). Lee and Lee (2015) investigate another possible factor – the worker’s contract type – using individual-level wage data from the Korean Labour & Income Panel Study during 1999-2007, linked to industry-level offshoring data from the World Input-Output Database. Görg and Görlich (2015) have performed a similar study using German data.

Inequality between permanent and temporary workers

The labour literature has pointed out the inequality between permanent and temporary workers (Booth et al. 2002). Temporary workers receive a lower salary, less training, less satisfaction, and less opportunity for new jobs than permanent workers. This research has documented that temporary workers are treated unfavourably simply because of their contract type rather than their work ability. Therefore, exogenous shocks, such as those provoked by offshoring, would more strongly affect temporary workers, who have little protection and a weaker bargaining position, through job losses or wage reductions.

Offshoring in South Korea has generally increased over time, with 11.5% of manufacturing inputs offshored in 2007. About 20% of manufacturing workers are on temporary contracts as of 2007. The level and trend of real wages differ significantly by contract type. The real wage of permanent workers was almost twice that of temporary workers as of 2007. At the same time, while the wages of workers with permanent contracts have increased sharply, the wages of those with temporary contracts have stagnated. This stark difference is partly explained by the characteristics of temporary workers relative to permanent ones. Temporary contracts are in wider use for less educated workers, younger or older workers, and female workers. It is not difficult to imagine that these workers do not have as strong bargaining power as highly educated workers, middle-aged workers, and male workers. It is also worth noting that temporary workers are less exposed to labour union opportunities. Only 8% of temporary workers have the opportunity to join labour unions in their workplace, while 23.2% of permanent workers do. Even when a labour union is in place, temporary workers have a lower participation rate than permanent workers by a 5.5 percentage point margin (69% versus 63.5%).

• These pieces of information suggest that temporary workers are indeed in a weaker bargaining position and, accordingly, temporary workers are likely to be the first group to be affected by the exogenous shock of offshoring.

The effect of offshoring on Korean workers

We first look at how offshoring affects Korean workers’ wages without distinguishing the sourcing country by its income level. We then distinguish sourcing countries as either high income (OECD) or low income (non-OECD) to investigate the effect of the sourcing on a country’s income level, because inputs offshored to low-income countries differ from those offshored to high-income countries. We also investigate the impacts separately for manufacturing and non-manufacturing to consider the possibly different characteristics of inputs by sector. Data for wages and contract type are from the Korean Labour & Income Panel Study (KLIPS); offshoring data are from the World Input–Output Database (WIOD), which allows us to directly measure offshoring. The dataset also enables the investigation of the possibility that offshoring to low-income locations (non-OECD) might have different effects than offshoring to high-income locations (OECD). The period we consider is from 1999 to 2007 so that the direct impacts of the 1997–1998 Asian financial crisis and the 2008 Great Recession can be minimised.

One concern in the regression analysis is the endogeneity issue. The contract type and the wage offer could be simultaneously determined between the individual worker and the employer. Also, if a temporary contract is itself the outcome of offshoring, we cannot think of the contract type as having been fixed at the time that offshoring was determined, in which case studying the causal impact of offshoring and its interaction with the temporary contract holding the contract type fixed does not make sense. To mitigate the issue of the contract type, we restrict our sample to the individuals whose contract type was constant during the sample period.

Our empirical findings confirm that contract type is indeed a factor influencing the impact of offshoring.

• Point estimates indicate that a 1 percentage point increase in manufacturing and non-manufacturing offshoring is associated with, respectively, a 0.9 and 5.3% increase in real wages for permanent workers in the manufacturing sector.
• However, the wage increase disappears for temporary workers.

The impacts of offshoring, when separated according to OECD and non-OECD countries, also differ. While offshoring to OECD and to non-OECD countries has both positive benefits for Korean permanent workers, only offshoring to non-OECD countries is statistically significant; a 1% point increase in manufacturing and non-manufacturing offshoring to non-OECD countries is associated with, respectively, a 1% and 5.5% increase in real wages for permanent workers in the manufacturing sector. Again, however, the wage increase disappears for temporary workers. Note that our empirical results are obtained even after the use of an extensive set of controls, including individual fixed effects.

Concluding remarks

Our findings suggest that the exogenous shock brought about by offshoring varies in its effect on wages in accordance with contract type, even if individual workers have similar capabilities for the job. Given that temporary contracts are in wider use among the already weaker groups in the labour market (i.e. the less educated, younger and older workers, and females), our findings provide evidence that globalisation indeed exacerbates wage inequality and show that the potential channel of growing inequality is the contract type. Because protective trade policies could lead to trade wars and are against globalisation trends under WTO, policies should be designed to directly reform the domestic labour market to reduce temporary work as suggested by Lee et al. (2013).

References

• Autor, D H, D Dorn, G H Hanson, and J Song (2014), “Trade adjustment: Worker level evidence”, The Quarterly Journal of Economics.
• Booth, A L, M Francesconi, and J Frank (2002), “Temporary jobs: Stepping stones or dead ends?” Economic Journal, 112(480), 189–213.
• Ebenstein, A, A Harrison, M McMillan, M and S Phillips (2014), “Estimating the impact of trade and offshoring on American workers using the current population surveys”, Review of Economics and Statistics, 96(4), 581–595.
• Görg and Görlich (2015), “Offshoring, wages, and job security of temporary workers”, Review of world economics/ Weltwirtschaftliches Archiv, 151(3), 533-554
• Lee, B, S Gwon, G Kim, D Kim, J Lee, B Cho, and M Lee (2013), “Research on transitions of temporary to permanent employment”, Research Paper PRISM 1490000-201400054, Ministry of Government Administration and Home Affairs, in Korean.
• Lee, H and J Lee (2015), “The impact of offshoring on temporary workers: evidence on wages from South Korea”, Review of world economics/ Weltwirtschaftliches Archiv, 151(3), 555-587.

About The Author

Joon H. Lee is associated with the University of Memphis.