Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

Offshoring, Low-Skilled Immigration, and Labor Market Polarization

Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

Offshoring, Low-Skilled Immigration, and Labor Market Polarization

Article excerpt

1 Introduction

Job creation, income inequality, and the disappearance of medium-skill jobs have been among the most debated topics in macroeconomics and labor economics lately. To put these issues into context, Fig. 1(a) illustrates the change in the share of U.S. employment across 318 non-farm occupations, which are ranked by skill on the horizontal axis. (1) The figure shows that the employment share of occupations typically held by middle-skill workers decreased over the last three decades. Instead, the employment gains were concentrated both in the high and low-skill occupations. Fig. 1(b) shows the corresponding evolution of wages for these same occupations, similarly ranked by skill. The pattern observed for wages is quite different than for employment. Notably, for occupations at the bottom of the skill distribution, the strong expansion in employment was not accompanied by a similarly robust increase in wages. However, the high-skill occupations witnessed a healthy wage growth that mirrored the growth of employment over the sample period. Similarly, the middle-skill occupations experienced depressed employment as well as wages.

Our hypothesis is that the asymmetric pattern of polarization across employment and wages was closely related to the increase in offshoring and low-skilled immigration over the past three decades. The empirical evidence indicates that labor tasks executed by middle-skill workers were the most affected by the rise in offshoring, which had a negative impact on employment and earnings for this group. This category includes "blue collar" workers like machine operators and assemblers in manufacturing, as well as data entry and help desk jobs, whose tasks are likely to be offshored. However, offshoring did not affect the employment prospects of low-skill workers, which are mostly employed for personal services that involve assisting and taking care of others (e.g., janitors, food industry workers, child care providers, health aids, gardeners). By definition, these low-skill tasks cannot be executed remotely, but only at the location

where these services are provided. In fact, Fig. 2(a) shows that the emergence of jobs in 'service occupations' explained practically all the employment gains for the low-skilled during the last three decades. (2) Our hypothesis is that the availability of cheaper offshore labor benefitted high-skill native occupations (e.g., managers and professionals), thus leading to a robust growth in their employment and wages. As the earnings of the high skilled increased, so did their demand for services. Although offshoring is not an option for these non-tradable services, immigration is an alternative. Consequently, many of the jobs created in this segment were taken by low-skill immigrants that arrived in large numbers during the last decades. To see this, Fig. 3 shows the data depicted in Fig. 1(a), but separates the native from the foreign born-workers. Basically, the employment share of low-skill occupations increased only for the foreign-born workers, whereas it changed little for the native-born workers. In fact, the polarization practically disappears when we only consider native workers, as their employment became increasingly concentrated in the high-skill occupations. (3) Thus, the sizable inflow of immigrant labor dampened low-skill wages, which explains why wages and employment in the low-skilled occupations had such a dissimilar pattern.

The goal of this paper is to rationalize this narrative in a unified structural model specification. We develop a tractable stochastic growth model that features skill heterogeneity, offshoring, and unskilled labor migration within a general equilibrium context. In this dynamic specification, the households' optimization behavior endogenously determines not only the extent of offshoring and migration, but also the optimal amount of training (skill acquisition) in response to changes in migration and trade policy, as well as to transitory and permanent macroeconomic shocks. …

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