Do Companies Pay a Wage Penalty For Having Offshored?

Like many well-intended strategies, offshoring has unintended consequences. We explore how companies with a history of offshoring are able to attract new employees in the future. We reason that companies need to pay a wage penalty to newly hired employees to compensate for the job insecurity signal they send when offshoring. Our theoretical model integrates mechanisms from the offshoring literature to models of compensating wage differentials. We test our predictions using offshoring survey data merged with employer– employee data for Denmark, resulting in a sample of 15.096 matched, newly hired employees by offshoring and non-offshoring companies. Our results suggest a 5% wage penalty in the case of offshoring companies, and show that this effect is stronger for domestic and cost differentiation oriented companies, but weaker when the newly hired employees join profitable companies. Taken together, this article advances our understanding of the adverse consequences of offshoring by emphasizing the labor market effects.