Trade Adjustment Costs in Developing Countries: - World Bank ...

9Production Offshoring andLabor Markets:Recent Evidence and aResearch AgendaMARGARET S MCMILLANThis note reviews the evidence on the labor market effects of production offshoringfor developed and developing countries, highlighting the outstanding issues.Production offshoring involves the relocation of physical manufacturingprocesses outside a country’s borders. Examples of production offshoring includethe manufacturing of electronic components by Intel in Costa Rica or the productionof personal computers by Lenovo in Vietnam. Although services offshoringis a growing phenomenon, its relative importance for determining labormarket outcomes is likely to be limited. Services offshoring to China and Indiaaccount for a tiny fraction of aggregate US activity in services; in contrast, offshoringaccounts for a substantial share of US manufacturing activity.We begin this note with a review of the theoretical models of offshoring. Next,we review the empirical evidence for developed countries drawing heavily onstudies done for the United States. While these studies focus primarily on the impactof offshoring on domestic labor markets, there are some important insightsto be gleaned from these studies regarding labor markets in developing countries.For example, Brainard and Riker (1997) find evidence consistent with thenotion of a ‘race to the bottom’. We then turn to the evidence for developingcountries. To date, almost all of the evidence for developing countries is based onsingle country studies that examine the effect of foreign direct investment bydeveloped countries on labor market outcomes in developing countries.The final section of this note summarizes the existing evidence and outlines aresearch agenda. In particular, we identify the following questions as deservingof more attention: (1) Does offshoring increase income volatility? (2) Does offshoringincrease wage inequality? (3) How substantial are the wage and employmenteffects of offshoring? (4) What are the general equilibrium effects ofoffshoring? (5) What are the implications of offshoring by China?