Service Offshoring and the Demand for Less-Skilled Labor: Evidence from Germany

Besides material offshoring, economists have started to analyze the impact of service offshoring on domestic employment. Services are of particular interest since their significance has grown in terms of both quantity and quality. One decade ago, most services were considered non-tradable, but the emergence of new information and communication technologies has contributed to overcoming geographical distance. The move towards the liberalization of international service trade has further accelerated this process. The empirical part of this paper first calculates German service offshoring intensities on a sectoral basis using input-output data. This measurement represents the proportion of imported service inputs used in home production. Germany’s average service offshoring intensity more than doubled from 1991 to 2003. In a next step, the impact of service offshoring on the demand for heterogeneous labor in Germany is estimated at a sectoral level including 28 manufacturing sectors. The partial static equilibrium model is based on a variable unit cost function in the general translog form allowing for quasi-fixed input factors. Two different skill-levels are taken into account. The estimation results indicate that service offshoring reduced the relative demand for less-skilled labor in the German manufacturing sectors by on average -0.06 to -0.16% per year between 1991 and 2000.