Offshoring, Labour Market Institutions and the Elasticity of Labour Demand

University of Nottingham Research Paper No. 2008/05

45 Pages Posted: 13 Mar 2008

See all articles by Alexander Hijzen

Alexander Hijzen

Organization for Economic Co-Operation and Development (OECD)

Paul Swaim

Organization for Economic Co-Operation and Development (OECD) - Directorate for Employment, Labour and Social Affairs (ELS)

Abstract

This paper analyses the evolution of the elasticity of labour demand and the role of offshoring therein using industry-level data for a large number of OECD countries. The first main finding is that the wage elasticity of labour demand has increased substantially. The finding that employment has become increasingly sensitivity to wages is shown to be robust to a wide variety of econometric specifications of labour demand, although some of this association may reflect a trend increase in the speed of adjustment rather than an increase in the long-run wage elasticity. A second finding is that more intensive offshoring is associated with more elastic labour demand, consistent with increased offshoring having expanded the flexibility of firms to adjust the mix of domestic workers and foreign value-added in production when relative factor prices change. More in particular, the average elasticity of labour demand appears to be about 30% to 40% larger in absolute value than the counter-factual elasticity which would have prevailed had offshoring not been possible. Increases of this magnitude might well have important implications for job security and worker bargaining power. Finally, we find some evidence that strict employment protection legislation weakens the link between offshoring and higher labour demand elasticity. This suggests that the impact of offshoring on labour demand elasticity depends on the national institutional environment.

Keywords: Employment protection legislation, international outsourcing, labour demand, worker insecurity

JEL Classification: F16

Suggested Citation

Hijzen, Alexander and Swaim, Paul, Offshoring, Labour Market Institutions and the Elasticity of Labour Demand. University of Nottingham Research Paper No. 2008/05, Available at SSRN: https://ssrn.com/abstract=1104698 or http://dx.doi.org/10.2139/ssrn.1104698

Alexander Hijzen (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Paul Swaim

Organization for Economic Co-Operation and Development (OECD) - Directorate for Employment, Labour and Social Affairs (ELS) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France
331 45241977 (Phone)

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