RIETI Report June 3, 2022

Local labour market effects of offshoring

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Welcome to RIETI Report.
This bi-weekly newsletter will keep you updated with the recent columns, event information and research results by RIETI fellows and other leading economists in Japan and around the world.

In this edition we present topics related to the impacts of offshoring on local labor market outcomes in Japan. Kiyota, Nakajima and Takizawa found that offshoring exposure led to higher local employment particularly among non-offshoring firms. Although policies supporting firms’ offshoring are sometimes unpopular, their results show that offshoring manufacturing activities can actually have positive effects on local employment.

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Editors of RIETI Report (Facebook: @en.RIETI / Twitter: @RIETIenglish / URL: https://www.rieti.go.jp/en/)

This month's featured article

Local labour market effects of offshoring

KIYOTA KozoResearch Associate, RIETI

NAKAJIMA KentaroFaculty Fellow, RIETI

TAKIZAWA MihoProfessor, Faculty of Economics, Gakushuin University

Offshoring is a controversial aspect of globalisation, and its impact on source country welfare remains ambiguous. This column analyses the impacts of offshoring on local labour market outcomes in Japan. It finds that offshoring exposure led to higher local employment, and particularly for non-offshoring firms. Furthermore, offshoring helped mitigate the negative effects of Chinese import competition on manufacturing employment. It highlights the increase in production by domestic plants as a potential mechanism to explain the positive effects of offshoring.

One of the most controversial aspects of globalisation is offshoring, meaning the transfer of manufacturing operations and business functions overseas. While the simple Ricardo-Viner model, which is also known as the specific factors model, suggests that the international factor movement generally enhances welfare of both offshoring source and host countries, more general models indicate the ambiguous effect of offshoring: the welfare of the source country may fall (e.g. Acemoglu et al. 2015, Egger et al. 2015).

Based on this understanding, the public tends to dislike offshoring. In the US, for example, less than 2% of survey respondents consistently support it (Mansfield and Mutz 2013, Figure 1) because of the possible negative economic consequences. For instance, when firms relocate their production abroad, workers may lose their jobs. Such negative impacts go beyond workers and affect the local economy (Frieden 2019), having negative effects on workers in auxiliary companies and local suppliers, and causing decreases in local income and property values, which eventually leads to young people leaving the area, and the decline of social services (Rickard 2021). Nonetheless, "there is little agreement among academic economists regarding the sign of offshoring's effects on domestic labour market outcomes, let alone the magnitude" (Kovak et al. 2021: 381). However, the studies on the local labour market effects of offshoring exposure are still limited.

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