The Impact of Outsourcing on the Japanese and South Korean Labor Markets: International Outsourcing of Intermediate Inputs and Assembly in East Asia

Applying a common empirical approach to comparable industry-level data on production, trade, and labor markets for Japan and South Korea, this paper aims to investigate the impacts of outsourcing on different sectors of the labor market focusing on differences in educational attainment. While outsourcing measures used in previous studies only take account of the outsourcing of intermediate inputs and do not capture the outsourcing of the final production stage (assembly), this paper, utilizing the Asian International Input-Output Tables, incorporates the outsourcing of assembly, taking into account the growing importance of the international fragmentation of production in Asia.The main findings can be summarized as follows. First, reflecting the fact that outsourcing to Asia (particularly to China) has a negative impact on the demand for workers with lower education and a positive impact on the demand for workers with highereducation, relative wage shares of workers by educational attainment have changed substantially both in Japan and Korea. Second, the overall effects of total outsourcing in terms of increasing (decreasing) the relative demand for workers with higher (lower)education have been insignificant in Korea partly because a substantial part of Korean outsourcing remained directed towards Japan, shifting labor demand away from workerswith tertiary education towards workers with lower education. Third, both in Japan and Korea, the international outsourcing of assembly has a significant impact on skill upgrading, particularly in the electrical machinery sector.