The Effect of Globalization on U.S. Labor Market: Service Sectors Considered

Abstract

How has globalisation affected employment and wages in the United States? Existing studies largely ignore the intersector labour movement between the manufacturing and service sectors by focusing only on the intrasector movement within the manufacturing sector. However, by decomposing the aggregate labour demand in the United States, we find that the intersector movement is more substantial than intrasector movement. Motivated by the decomposition results, this study presents a three-sector model that includes a manufacturing sector and two service sectors at varying skill intensities. The model shows that offshoring might translate into smaller-than-expected wage changes because of the intersector labour movement. In line with the theoretical predictions, two notable empirical results are presented. First, an occupation's exposure to offshoring has non-significant, albeit negative, effects on wages. Second, the more an occupation is exposed to offshoring, the lower its employment in the manufacturing sector as a share of its total employment. Furthermore, these effects are larger for more routine occupations or those requiring less education.

Keywords: Globalization, Offshoring and Trade, Employment, Service Sector

JEL Classification: F16, F15, J31