New report provides comprehensive data on relocation in Denmark

In June 2008 the Danish Ministry of Economic and Business Affairs published a report on outward relocation by Danish companies. It is the first report to give a broader and comprehensive picture of the nature and extent of relocation and provides much needed evidence for debates about feared negative employment effects of globalisation. In general, net employment effects are only modestly negative and do not lead to long term unemployment. However, the evidence does also suggest that unskilled workers are in a relatively disadvantageous position.

A [new report](http://www.oem.dk/graphics/oem/nyheder/Pressemeddelelser 2008/¢kn Tema 6 - juni 2008.pdf) aeuro~[Danske virksomheders outsourcing](http://www.oem.dk/graphics/oem/nyheder/Pressemeddelelser 2008/¢kn Tema 6 - juni 2008.pdf)aeuroTM published in June 2008 by the Danish Ministry of Economic and Business Affairs (A~konomi- og Erhvervsministeriet) sheds light on relocation in Denmark during the period 2001-2006. The report treats outsourcing both domestically and abroad in the beginning chapters, while the bulk of the study is on outward relocation. Often seen as threatening domestic employment, many workers and trade unionists have accused outward relocation for representing a negative flipside to globalisation and capital mobility. Indeed, the possibility of outward relocation has been viewed as facilitating aeuro~regime shoppingaeuroTM whereby transnational management source production to low-cost countries. This comprehensive report to a large extent demystifies the phenomenon by giving an unprecedented overview of the nature and extent of relocation in Denmark (see also DK0506102F)

About the report

Despite receiving substantial attention from policy-makers, academics and the media, the debate on relocation has largely been centred on anecdotal evidence together with high-profile cases and statistical evidence on the scale and importance of relocation has been missing.

The report is therefore the first of its kind to give a representative picture of relocation by Danish companies and builds on comprehensive company level data. 5,100 enterprises with at least 20 employees returned the questionnaire which covers a range of issues connected to relocation. This amount to a response rate of 81% and the concerned enterprises constitute approximately 60% of private urban employment. Relocation before 2001 was not included in the questionnaire.

Data has been gathered and examined by the ministry and Statistics Denmark (Danmarks Statistik) and the report is part of a EUROSTAT initiative aimed to shed light on international sourcing of European enterprises. Statistics Denmark has concomitantly published a comparative report on relocation in Scandinavia, the Netherlands and Finland (Statistics Denmark 2008: International Sourcing: Moving Business Functions Abroad).

Main Findings

The study shows extensive use of relocation in Denmark with nearly one fifth of Danish companies relocating jobs abroad during the period 2001-2006 thus putting Denmark at top of the table compared to the other surveyed countries.

Figure 1

Source: Statistics Denmark: International Sourcing aeuro" Moving Business Functions Abroad (2008)

One of the main drivers for popular interest in relocation has been the potentially detrimental consequences for employment in sourcing countries. However, as the report shows, relocation does not only mean job losses at home, but also job creation directly attributable to sourcing of production abroad. Furthermore, the evidence suggests that outsourcing companies experience improved value growth compared to non-sourcing companies.

Gross figures reveal a yearly job loss of 6,300 for the surveyed period and a yearly job creation of 2,900, giving a negative net employment effect of 3,400 for relocation. This is only 0.9 % of employment in the surveyed companies and a very modest figure compared to the fact that 260,000 jobs are terminated and created yearly in Denmark. The results correspond well with earlier estimations of the modest employment effects stemming from relocation (source: Det A~konomiske RA¥d 2003: Dansk A~konomi, forA¥r 2003).

Furthermore, the study also finds no significant difference between employment levels for workers in relocating companies compared to workers in companies that do not relocate. Taking the group of employees that were employed in 2000 in both sourcing and non-sourcing companies it was found that 87% and 88%, respectively, were still employed in 2005. This indicates that the risk of being non-employed (unemployed or economically inactive) is not enhanced by relocation in the medium/long run. This picture is, moreover, confirmed by the unemployment rate for workers in sourcing companies compared to workers in non-sourcing companies aeuro" both groups experiencing a 3,5 % average unemployment rate during the 2001-2006 period. Authors of the report go on to suggest that relative high job mobility in the Danish labour market increase the possibility for finding new employment quickly after your job has been relocated. In this light, the so called flexicurity model in Denmark could be seen as facilitating rapid and financially painless transitions for workers affected by relocation.

Unskilled workers and relocation

The main findings of the report to some extent demystifies fears about the detrimental effects on employment at a general level, but how do different groups of workers fare when they are subject to relocation at their workplace? Previous studies from other countries have suggested that unskilled workers are specifically at risk of unemployment connected to relocation. A case in point is the study by Geishecker in 2006 (Does Outsourcing to Central and Eastern Europe Really Threaten Manual Workers' Jobs in Germany, The World Economy, vol. 29, no. 5, pp. 559-583) who shows that outward relocation to new EU-member states has had a discernable negative impact on labour demand for low-skilled manufacturing workers in Germany. Relocation per se could therefore contribute to the overall decline in demand for these groups of workers in Europe.

The study on Denmark seems to support the claim that relocation forms an independent threat for unskilled workers, at least to some extent in manufacturing. Of the 6,300 job being relocated yearly, 3,450 were unskilled. When discounting the 1,300 unskilled jobs created from relocation yearly, the net job losses amount to 2,150 unskilled positions. The corresponding figure for skilled work is a net loss of 800 jobs yearly.

These figures can be broken down according to industry. Looking at the types of jobs relocated from manufacturing, there are significantly more unskilled jobs going abroad than skilled ones. 12% of unskilled jobs had been relocated in manufacturing compared to 7% of skilled jobs. Conversely, in services approximately 2% of unskilled work went abroad while 7% of skilled jobs were relocated. As the report notes, this converse picture has to do with the nature of unskilled work in manufacturing in relation to services. In the latter, unskilled work are primarily auxiliary services like cleaning and maintenance that are bound to locations. Unskilled manufacturing is less bound to location because of improved ICT, removal of trade barriers and improved cross-border logistics that facilitate splitting up national supply chains.

Figure 2

Source: Ministry of Economics and Business Affairs: Danske virksomheders outsourcing, 2008

The picture becomes slightly grimmer when comparing unemployment rates for unskilled in sourcing and non-sourcing enterprises. Here it is found that the latter group has a slightly higher rate of unemployment aeuro" 4,7 % compared to 4,2 %. For workers with higher education the rates are 2,2 % and 2,3 %, respectively.

Figure 3

Source: Ministry of Economics and Business Affairs: Danske virksomheders outsourcing, 2008

So while unemployment rates are generally higher for unskilled workers mirroring more general trends in the labour market, unskilled workers in sourcing enterprises do experience higher rates than their counterparts in non-sourcing enterprises. Possible reasons for this difference might be connected to lacking adaptability of unskilled workers in very dynamic parts of the economy apt for relocation. This in turn places a large task with policies on life-long-learning and retraining efforts for these groups as the report notes. Again, the Danish flexicurity model seems to be at play here with strong focus on employability for both employed and unemployed.

Reasons for relocation

Connected to risks for certain groups of workers is the issue of why companies choose to relocate in the first place. It has often been argued that relocation can be market-driven (new markets and proximity to customers), efficiency-driven (focus on core-activities and reduction of costs), resource-driven (access to scarce resources, both natural and human resources) or strategy-driven (risk-sharing on investments and increase of supply chain flexibility). While Danish companies report a broad range of the four general reasons, relocation is mostly motivated by cost-reductions and especially labour-cost reductions. Nearly 60 % of companies report lower wages as a driver during the period of 2001-2006.

Labour-cost reductions are, furthermore, more prevalent in industry compared to the service sector. More than 70% of industrial enterprises list labour-costs as a key driver, whereas only 42% of service sector enterprises report this.

Figure 4

Source: Statistics Denmark, StatBank Denmark (own extracts), 2008

Companies have also been asked what drives projected relocations in 2007-2009. Interestingly, nearly 70 % of companies now list lower labour-costs as driver for projected relocations in this period. Given that unskilled work is usually the most labour-intensive this projection is worrying for these individuals.

Another interesting projection is rooted in the current labour market situation of Denmark. In a tight labour market just over 30% of companies are thus projecting relocation because of labour shortage aeuro" this is up from 16% in the period 2001-2006. This seems to suggest that Danish companies in fact are forced into relocating if they do not want to miss out on future orders.

Views of social partners

Contrary to the situation in other European countries outward outsourcing does not generally spur conflict between social partners, although local disagreements might occur. LO aeuro" The Danish Confederation of Trade Unions aeuro" proposes a proactive national strategy of strong focus on life-long learning and training, obtained either through collective bargaining or tripartite agreements with the Liberal-Conservative government together with an international effort to secure fair employment in receiving countries. LO also stresses that that the so called aeuro~flexicurityaeuroTM model helps transitions into new jobs which in turn might explain the relatively positive view on outsourcing. DI, Danish Industries, provides guidance and advice for member companies that wish to go abroad and strongly encourage this move. While positive about the general business conditions in Denmark, DI points to increasingly tight labour markets that might force companies to outsource jobs that are both low and highly skilled. This is seen as a main reason for reforms of income taxes and social security systems to increase labour supply.

Commentary

While the overall consequences of relocation might be positive for the Danish economy as a whole and negative employment effect negligible, the unskilled workers seem especially at risk when companies decide to move jobs abroad, especially in manufacturing. Danish trade unions representing these individuals seem to have chosen a proactive strategy. Danish flexicurity combining, high external numerical flexibility, high spending on active labour market policies and life-long learning together with high income security, seems to facilitate transitions for workers affected by jobs going abroad. As such, relocation is therefore not seen as a great threat to Danish workers and the evidence in this report on relocation should not give rise to renewed militant voices about protectionism and strict employment protection.

Christian Lyhne Ibsen, FAOS