How do immigration and offshoring affect native workers?

11 February 2020

In a new study we identify effects on both employment and bargaining power.

By Michael Landesmann and Sandra M. Leitner

  • Immigration and offshoring affect all occupations, but in different ways.
  • Native clerical workers and manual workers are more likely to lose their jobs than managers and professionals.
  • In relative terms, offshoring leads to stronger employment losses than immigration.
  • Depending on the particular type of offshoring and the occupational group considered, the loss in employment from offshoring can be between 2 to 9 times stronger than from migration.
  • Not all occupations experience a deterioration of their bargaining power from immigration and offshoring; for some, the bargaining position even improves.
  • Immigration, particularly of managers and professionals, has strong and widespread direct and indirect effects for native workers in several other occupations.

Over the past few decades, the process of globalisation has proceeded rapidly, particularly in terms of the fast expansion of international production networks (offshoring). In addition, international migration has reached unprecedented levels, as increasingly more people migrate for economic and political reasons.

In advanced economies, these developments have sparked a heated and partly controversial debate as to the economic and social consequences of globalisation. While globalisation creates gains for consumers (in terms of higher living standards) and producers (cost advantages and productivity improvements), there is also concern that they harm others in various ways. In this respect, workers, and particularly unskilled workers, tend to be on the losing side. As a result of the possible substitution of migrant workers for native workers, as well as the offshoring of mainly low-skill-intensive tasks (but increasingly also more skill-intensive tasks) to low-wage countries, workers in advanced economies perceive that their employment opportunities dwindle and that their wages get squeezed.

However, the rich strand of economic literature on the labour market effects of globalisation shows that, in quantitative terms, both offshoring and migration only have limited effects on workers’ employment and wages (if at all), which stands in stark contrast to the alarmist perception expressed in the public debate. An important aspect that is often ignored is that globalisation may also affect workers indirectly by weakening their bargaining power and reducing the scope for risk-sharing agreements between workers and their employers, which implies an increase in the elasticity of labour demand (see the work by Dani Rodrik).

The labour market effects of immigration and offshoring

Our new study addresses this potential additional channel through which globalisation may affect native workers. It analyses both the direct labour demand and indirect demand elasticity effects of immigration and of different measures of offshoring for four different occupational groups. As such, in various ways, it goes beyond what is typically found in this literature.

First, it is the first study to directly estimate the role of immigration for the demand elasticities of native workers. So far, similar analyses have only been undertaken for offshoring. Second, it simultaneously looks at the effects of both immigration and offshoring, which allows us to discern their relative impact on the labour demand and demand elasticities of native workers. Third, it looks at occupational rather than educational categories and analyses four occupational groups, namely managers/professionals, clerical workers, craft (skilled) workers and manual workers. This differentiation is important as it allows us to more directly determine the complementarity or substitutability in production between migrant and native workers when they actually compete for the same jobs and occupations. The use of occupational categories (rather than educational attainment levels, as in almost all research hitherto) avoids the potential bias inherent in analyses based on educational attainment that stems from the non-negligible job-skill mismatch that is typical of migrant workers, and from the underutilisation of their skills in jobs that require few qualifications.

The analysis uses detailed data for Austria, Belgium, France and Spain for the period since the global financial crisis (2008-2017). The main findings of the study are as follows:

  • Both immigration and offshoring – particularly services offshoring which has expanded strongly over the last years – have important direct and indirect effects which, however, differ across occupations.
  • Both immigration and offshoring have negative direct employment effects on all occupations but harm native clerical workers and manual workers the most and native managers and professionals the least. This result demonstrates that while globalisation negatively affects all occupations, jobs that require less qualification (i.e. clerical workers and manual workers) are more strongly affected than employees with higher levels of training and education (craft workers and professionals).
  • In relative terms, offshoring generates a stronger direct negative employment effect than immigration.
  • Depending on the particular measures of offshoring and the occupational group considered, the negative employment effect of offshoring can be between 2 to 9 times stronger than of migration.
  • Both immigration and offshoring also have important indirect elasticity-effects which highlights that globalisation affects native workers twice: first, through the direct – and generally negative – employment effect and, second, through an indirect elasticity-channel which affects their bargaining power.
  • However, the elasticity-effect can also be positive. This can be interpreted as an improvement of the bargaining position of native workers. In particular, while native manual workers tend to experience a deterioration of their bargaining power from both immigration and offshoring, native craft (skilled) workers tend to gain from both forces of globalisation through an improvement of their bargaining position.
  • Native clerical workers and managers and professionals also experience an improvement of their bargaining position, but only as a result of offshoring but not immigration. Hence, globalisation, which is associated with a complex readjustment in terms of tasks and occupational specialisation (e.g. between offshored tasks and those kept in the country, but also between tasks performed by migrant workers and those retained by native workers) can also lead to an improved bargaining position of native employees in certain occupations.

Skilled immigration gives rise to strong and widespread effects across different occupations

The analysis also looks into the more complex cross-effects of immigration. We determine how immigrants in each of the four types of occupation affect labour demand and demand elasticities of native workers in the same and other occupational categories.

We find that there are generally similar effects of immigrants of a particular occupation on the labour demand and labour demand elasticities for native workers of the same occupation. However, the analysis also finds interesting effects across occupations that differ across occupational categories.

In this context, on the one hand, migrant managers and professionals play an important role and affect several native occupations twice. In particular, an increase in migrant managers and professionals is associated with an increase in employment of native clerical workers and manual workers which points to complementarity effects. At the same time, the same native occupational groups (as well as native craft workers) experience, on the other hand, a weakening of their wage bargaining positions.