Atlanta Fed 2013 Annual Report: Polarization-Offshoring
Are Jobs Going Overseas Faster?

Since the 1990s, corporations have moved large numbers of jobs, especially in manufacturing, out of the United States to countries with lower labor costs. Yet that fact itself does not mean that offshoring results in no additional job creation here in the United States.

In fact, Atlanta Fed economists have looked at the net effect of offshoring and found evidence of some countervailing job creation that occurs as a result. For instance, when a manufacturer of hand-held electronic devices sends its manufacturing overseas, that might increase the overall competitiveness of the firm, pointed out Atlanta Fed research economist Federico Mandelman. Consequently, the firm could hire more higher-wage domestic workers such as marketers or product designers.

A paper prepared for a 2010 Atlanta Fed conference on immigration concluded that offshoring has little or no effect on domestic employment. “Increased offshoring reduces the share of native employment in an industry while…stimulating overall industry employment via the productivity effect such that offshoring has no aggregate impact on the level of native employment,” wrote the economists Gianmarco Ottaviano, Giovanni Peri, and Greg Wright.

Labor market polarization has hollowed out middle of jobs spectrum

The U.S. labor market has become polarized over the past three decades: employment growth has been strong for both high- and low-skill occupations, while jobs for middle-skilled workers have disappeared. Real wages have followed a different pattern. Wages for high-skill occupations have increased; earnings of low- and middle-skilled workers generally have not.

Along with technological change and immigration of low-skilled workers, offshoring appears to be a significant factor in labor market polarization, Mandelman has found. Jobs done by middle-skilled workers are the jobs that are typically offshored. In addition, research shows that the weakening of labor unions over time may have contributed to the decline of middle-skill jobs.

Labor market polarization has been associated with job losses in occupations that involve routine tasks, which are typically found in the middle of the skill distribution. Routine occupations include blue-collar manufacturing jobs and office and administrative support. These workers tend to follow well-defined procedures that can be coded in computer software, executed by machines, moved to lower-wage countries, or assumed by immigrants who will generally work for lower wages than native workers.

It’s clear that labor market polarization has occurred over decades. But economists debate whether and how much polarization accelerated during the Great Recession and other downturns. Researchers at the Kansas City Fed concluded in a 2013 paper that while labor market polarization is a long-term phenomenon affecting all economic sectors, it intensifies during recessions. The rapid pace of polarization during recessions, according to the research, stems from the decline in the share of middle-skill occupations in manufacturing and, to a lesser extent, in construction.