Offshoring, Inequality and Education

This article looks at the problem of inequality in relation to globalization and it reports on in research in Denmark that raises questions about policy implications.

One widely held theory is that inequality is due to a rising wage premium for college educated workers. Since college educated workers get a wage premium, inequality can be reduced by providing greater access to higher education. In particular, according to Tom Friedman, and many in the current administration, we need to increase the number of graduates with skills in science, technology, engineering and math (STEM).

One of the problems with that theory is that Asian countries are moving up the value added chain. More of the work that they perform requires workers with STEM focused education. The contest then becomes an education battle between the US, Europe and Asia over the development of STEM related skills. One of the problems in this contest is that education costs in the US are rising faster than inflation, and tax starved states are cutting back on funding state universities which provide most of our college graduates. European countries have a similar problem. We may be educating students for jobs, at high cost, that no longer exist.

One of the studies reported in this article suggests that the college skill premium is for workers who have language and communication skills that are in high demand as firms extend their supply chains internationally and enter foreign markets. There was no skill premium for STEM educated labor. That is because STEM is an international language that is available to everyone educated in these subjects. A study in Denmark showed that college educated workers who were retained during offshoring experienced wage increases while unskilled workers experienced lower wages. The most valued skills were in communication related areas associated with the retained college educated workers.

The Danish study provided other useful information. Some firms that offshored labor became more productive and they expanded their exports. Both skilled and unskilled labor in exporting firms received higher wages. In firms that did not benefit from increased exports the story was very different. Both skilled and unskilled workers who lost jobs to offhoring suffered from higher wage loss and more persistent unemployment than workers who were laid off for other reasons. The jobs lost to offshoring were in low demand in the firm as well as in low demand in the general economy. The jobs lost for other reasons were in greater demand in the general economy and workers were more able to find similar employment.

The implication from this research is that education is less important than what you study and whether you work for a firm that becomes more competitive via outsourcing and more able to expand exports. This helps to explain inequality that results from education and skill premia. It does little, however, to explain the inequality that results from the dramatic increases in compensation that has gone to top corporate executives, and especially to those who work in financial service industries that benefit from monopoly power and monopoly profits.