Does outsourcing to central and Eastern Europe really threaten manual workers' jobs in Germany?

Starting from the observation of significant within-industry skill-upgrading, this paper analyses how international outsourcing has affected the relative demand for manual workers in German manufacturing during the 1990s. We combine trade and input-output data to disentangle international outsourcing and trade in final goods and differentiate between the effects of narrowly and broadly defined outsourcing towards Central and Eastern Europe (CEEC), the European Union (EU15) and the rest of the world. Accounting for the endogeneity of international outsourcing by applying instrumental variable techniques, the empirical analysis showed that international outsourcing is indeed an important explanatory factor for the observed decline in relative demand for manual workers in German manufacturing. Particularly, outsourcing towards CEEC plays a major role, irrespective of whether a narrow or wide measure of outsourcing is applied. Using a narrow outsourcing measure and controlling for the adverse demand effects of skill-biased technological change, time-changing industry characteristics, wages as well as industry unobserved characteristics, international outsourcing towards CEEC is found to have lowered the manual workers' wage bill share by 2.7 per-centage points between 1991 and 2000. In its magnitude this effect is comparable to the skill-biased effect of technological progress, as captured by our controls. Outsourcing towards countries outside CEEC and outside the EU15 is found to have small negative effects on the relative demand for manual workers, but only if one follows the broad definition of international outsourcing. Outsourcing towards the EU15 is, however, always found to be insignificant. © 2006 The Authors Journal compilation © 2006 Blackwell Publishing Ltd.