Offshoring and labor income risk: an empirical investigation

Abstract

This paper analyzes how increased offshoring affects labor income risk. Dealing with the variability of incomes, it is therefore distinct from a large number of studies explaining the level effects of globalization on income in the labor market. It provides an assessment that directly connects labor income risk and offshoring trends in a panel setting at the industry level using German data. Importantly, we distinguish between transitory and permanent risk to individual income. Permanent income risk is defined as the variance of unpredictable shocks to income that do not fade out over time. Different from transitory short-term fluctuations, it has a particular welfare relevance. Our findings suggest that, at the industry level, permanent labor income risk decreases with offshoring. This effect is particularly strong for offshoring to low-income destinations.