Outsourcing and low-skilled workers in the UK

Abstract

This paper investigates the impact of ‘outsourcing’ on the relative wages and employment of the low-skilled in the UK. In contrast to previous studies which proxy outsourcing by imports from all countries, we examine whether the source of imports is important. We disaggregate UK imports according to individual supplier countries and construct import penetration terms for different groups of countries - ie, distinguishing between imports from industrialized countries and imports from low-wage countries - for each 4-digit industry within the broader categories of textiles and non-electrical machinery. Our econometric results show that imports from low-wage countries have made a significant contribution to the decline in the relative wages and employment of the less-skilled in the UK, with no discernible effect resulting from imports originating from industrialised countries. The estimates suggest that rising imports from low-wage countries may account for about 40 per cent of the rise in the wage bill share of skilled workers, and approximately one-third of the increase in their employment share, in the UK textiles sector during the period 1970-1983. We also offer some limited evidence that the degree of outsourcing may differ across industries and that large currency appreciations may have a disproportionately large impact on the economic fortunes of the less-skilled, partly by creating an increased ‘threat’ of outsourcing