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Does Outsourcing Create Unemployment? The Case of the Danish Textile and Clothing Industry

Outsourcing and job losses to countries with lower wage costs are common to many Western countries, and are issues of great public concern due to their economic and social impact. This paper looks at the impact on labor of a dramatic change in the Danish textile and clothing (T&C) industry, causing large reductions in the total level of the employment. This development, which is well known in most Western countries, is characterized by strict rationalization and outsourcing strategies, but has been of a larger magnitude in Denmark than in many other places. In this connection, one would expect a major increase in unemployment among former T&C workers. To address this issue we follow each individual worker employed in the T&C industry and seek to answer the question whether transitions into unemployment are higher than the manufacturing industry average. Contrary to expectations we find that although employment in the T&C industry drops by more than 80% from 1975 to 2000, a surprisingly large number of employees who leave their jobs, or are laid off, are rehired within the same industry until the early/mid 1990s. After this point the majority is able to find jobs in other industries. Moreover, only a small fraction of people from the T&C industry enters unemployment compared to the manufacturing industries in general, while a larger fraction enters retirement and education. Concurrently with this development, we find that the inflow of people into the T&C industry is declining sharply. Hence, based on these findings we argue that the reallocation problem of the T&C industry generally is solved through a natural phase out, and through the ability of employees to find work in other sectors along with a gradual stop of recruitment of new and younger employees.