Services and materials outsourcing to low-wage countries and employment: Empirical evidence from EU countries

Abstract

This paper presents further insights into the employment effects of the international outsourcing of services to low-wage countries based on a sample of manufacturing and non-manufacturing industries for five EU countries. For the non-manufacturing sector, our results indicate that while the total of internationally purchased services is not important, purchased services from low-wage countries have a statistically significant but rather small negative impact on employment. In terms of the magnitude of its impact, the results suggest that outsourcing of services to low-wage countries has decreased employment by 0.2 percentage points per year from 1995 to 2000. However, we do not find any negative effect of the change of internationally purchased business services from low-wage countries on the demand for labour, suggesting in turn that other types of purchased services are responsible for the negative employment effects. For the manufacturing sector, while purchased services from low-wage countries is not significant, the outsourcing of intermediate materials to low-wage countries appears to have a relatively small negative impact on the demand for labour. The effect is more pronounced for intermediate materials from China and the East Asian countries than for those from Central and East European countries.