Patterns of international fragmentation of production and the relative demand for labor

Abstract

Growing shares of international trade flows consist of intermediate and unfinished goods shipped from one country to another to combine manufacturing or services activities at home with those performed abroad. This configuration of the productive structure has been named “internationally fragmented.” The purpose of our work is to analyze the labor market effects of international fragmentation of production, looking at how it affects relative labor demand. Models of trade due to fragmentation of production suggest that when international fragmentation takes place we might observe a change in the factor proportion in the affected industries. We use outward-processing-trade data - specifically related to international fragmentation of production - to test if the shift in the ratio of skilled and unskilled labor employed in Italy and Germany during the 1990s is related to fragmentation.