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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar. Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Non-technical summary Since trade is becoming more of a task-related phenomenon due to the increase in offshoring activities by firms, the pattern of effects across workers is changing as well. In particular, the skill-based characterization of differentially affected groups falls short of comprehensively capturing the effects. Offshoring occurs based on relocation cost for single occupations, which do not necessarily reflect skill intensities. This paper puts this claim to a test by analyzing industry level relative labor demand from a task perspective. First, a model is developed to describe the mechanisms underlying the link between offshoring and shifts in employment and cost shares of tasks. This model explicitly treats occupations as fixed bundles of tasks which are, as a whole, subject to the offshoring decision. This is a crucial difference to skill-based approaches, in which individuals either supply high-skilled or low-skilled labor, with complete mobility across industries or stages of production. Furthermore, the model highlights the between-occupation dimension in task share changes in the economy. The model introduces a sorting mechanism of individuals across occupations, which relies on a trade off between occupations specific wages and individual abilities in terms of effort needed for the execution of certain tasks. In such a setting, an overall fall in offshoring costs can shift the cut-off occupation, which separates home from foreign production, such that the range of occupations at home shrinks. Crucially, this remaining range of occupations is characterized by a higher non-routine and interactive task content. Since workers whose jobs have gone offshore optimally re-sort into these occupations, average employment shares and cost shares of routine and non-interactive tasks fall in the home economy. Introducing occupations as bundles of tasks provides a new and consistent way of theoretically sound estimation of relative labor demand for tasks. Second, the theoretical predictions are tested with industry level data from German manufacturing. A clear and robust result emerges. An increase in offshoring significantly reduces home country relative demand for routine and non-interactive tasks -in particular if this offshoring is directed towards non-OECD countries. This result is robust to various alterations and the use of instrumental variable methods. The additional value compared to skill related measures is demonstrated by the fact that this demand shift is also observed when controlling for the skill composition of industries. The main results show offshoring to account for up to 24% of the observed "task-upgrading" over the period 1998-2007. Das Wichtigste in Kürze September 2013 Abstract This paper provides new evidence on how offshoring shifts relative labor demand for tasks at the industry level. A novel theoretical mechanism, based on sorting of heterogeneous workers into occupations with task dependent offshoring cost, guides estimation. Cost shares of tasks are linked to offshoring in a panel estimation using German data for 1998-2007. It is shown that offshoring shifts home country relative labor demand towards more complex tasks with higher relocation cost. This demand shift holds when controlling for an industry's skill composition and is particularly strong for offshoring to non-OECD countries. . keywords: trade, offshoring, tasks, relative labor demand JEL codes: F16, F66, J23 * This version: September 2013. For very helpful remarks and suggestions, I would like to thank Claudia Buch,

Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Abstract Recent contributions on offshoring often assume that firms can freely split their production process into separate steps which can be ranked according to the cost savings from producing abroad. We replace this assumption by the notion of a technologically determined sequence of production steps. In our model, cost savings from offshoring fluctuate along the production chain, and moving unfinished goods across borders causes transport costs. We show that, in such a setting, firms may refrain from offshoring even if relocating individual steps would be advantageous in terms of offshoring costs, or they may offshore (almost) the entire production chain to save transport costs. Small variations in model parameters may have a substantial impact on offshoring activities. JEL classification: D24, F10, F23.

Any opinions expressed here are those of the author(s) and not those of the institute. Research disseminated by IZA may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit company supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA Discussion Paper No. 1907

This report considers the impact of offshoring on labour markets. The report begins by surveying the empirical literature linking offshoring activities to changes in employment and the relative wage and employment of high- to low-skilled workers. The report moves on to consider recent developments in offshoring activities and in labour markets for a sample of 40 developing and developed countries. Based on these developments the report draws conclusions on the likely developments in offshoring and its impact on labour markets. Offshoring and Labour Markets 1.

not figure on the paper version. 2005 WORLD TRADE REPORT Exploring the links between trade, standards and the WTOFOREWORD The World Trade Report 2005 follows the pattern established in previous years and takes up a number of key trade policy issues facing the international trading system for analysis and discussion. The underlying objective of the Report is to contribute to a deeper understanding of trade policy issues facing governments. The core topic in this year’s report is standards and international trade. Shorter essays have been prepared on three other topics – the use of quantitative economic analysis in WTO dispute settlement, international trade in air transport services, and offshoring services. First, however, the Report examines recent trends in international trade. The year 2004 saw impressive growth in trade, against a background of strong output growth. At 9 per cent in real terms export growth was twice as fast in 2004 as in 2003, and the third highest over the last decade. All regions shared in this expansion to a degree, but 2004 was a particularly good year for some commodity-exporting developing countries, including Africa. Other regions that enjoyed strong trade performance were South and Central America, Asia and the

Despite the recovery in the world economy in 2003 and 2004, unemployment remained high in many industrial countries. Even in those countries which reported a strong recovery, such as the United States and the United Kingdom, employment levels recovered only moderately, leading many observers to wonder about a “jobless recovery”. Although employment growth typically lags behind in each cyclical output recovery, sluggishness in services sector employment seemed to be a new development. In previous downturns, the services sector continued to generate new jobs. The information communications technology (ICT) sector – one of the most dynamic sources of new employment in the 1990s – not only slowed down in terms of job growth, but actually experienced a decline in the payroll after the ICT crash in 2000-01. Many dot.com companies and telecom firms closed down or had to downsize as investment outlays in IT hardware and software decreased in OECD countries. 1 In those bleak times in 2002 and early 2003, when the recovery was still rather fragile, a number of reports emerged highlighting the potential for substantial cost savings to firms which could source some of their inhouse supplies – in particular information technology (IT) services – from low-cost locations. These reports, released mainly by business consulting firms and industry associations, had discovered a new “mega-trend”: the offshoring of services. The authors of these reports argued that thanks to the increased digitization of

A simple model of offshoring, which depicts offshoring as ‘shadow migration, ’ permits straightforward derivation of necessary and sufficient conditions for the effects on wages, prices, production and trade. We show that offshoring requires modification of the four classic international trade theorems, so econometricians who ignore offshoring might reject the Heckscher-Ohlin theorem when a properly specified version held in the data. We also show that offshoring is an independent source of comparative advantage and can lead to intra-industry trade in a Walrasian setting. The model is extended to allow for two-way offshoring between similar nations, and to allow for monopolistic competition. We also show that, unlike trade in goods, trade in tasks typically makes all types workers better off (with some proviso). 1.