The Effect of International Outsourcing on Job Growth in Korea

This paper empirically investigates the effect of international outsourcing, which is measured by foreign value added contents share of gross exports, on Korean firm level employment in manufacturing industries. Using OECD-WTO trade in value added industry level data and Korean firm level employment data between 2000 and 2009, this paper finds that international outsourcing has negative and statistically significant effects on job growth in Korean manufacturing employment. However, the effect of international outsourcing on employment differs on labor intensity of the manufacturing industries. In particular, an increase of foreign value added content of gross exports in the labor intensive industries (instrumented by lowering sector-specific tariffs) by 1 percent decreases firm employment level by 0.27 percent while it increases 0.31 percent in the high technology industries in Korea. Overall the effect of international outsourcing on job growth in the manufacturing sector decreases firm employment by 0.13 percent, implying the net displacement effect in the labor intensive industry dominates the net productivity effects in the high-technology industries. The empirical findings are robust even after taking into account the roles of headquarter intensity and firm heterogeneity in outsourcing.