relocation of jobs in the danish financial sector · 2017-12-04 · preface by finansforbundet in...

Relocation of jobs in the Danish financial sector

Consequences for employees, companies and the society

Finansforbundet

08 September 2017

Authors:

Sigurd Næss-Schmidt

Dr Palle Sørensen

Dr Christian Heebøll

Preface By Finansforbundet

In recent years, the financial sector has become more and more international, not least due

to the digitalisation of products and processes, which has made work more moveable - also

across borders.

Finansforbundet (the Financial Services Union Denmark) believes that globalisation is the

new reality for our members, their employers and for us as a union. Financial services and

businesses are not limited by borders. The members of Finansforbundet have felt this de-

velopment at first hand in the sense that they have more foreign colleagues in Denmark,

and some work in global teams across borders. Some members see their jobs disappearing

out of the country, and for the individual member this is, of course, a huge personal loss.

Here, we as Finansforbundet is focused on helping our members in new employment in the

best possible way. We believe, however, that the responsibility of ensuring finance employ-

ees the relevant skills and competences now and in the future is a joint task of both finance

companies and the union.

It is clear to us, that the internationalisation of functions and jobs has implications for our

members, the financial sector and the society in general. The actual extent and proportion

for the financial sector – along with the consequences for the Danish economy – has not

been fully disclosed and analysed. This knowledge base is necessary to address the issues

and problems – and to take advantage of the opportunities.

Finansforbundet has, therefore, asked Copenhagen Economics to analyse the movements

of finance/IT jobs across the Danish border to have a factual understanding of the issue of

international division of work in the Danish financial sector.

More specifically, we have asked CE to analyse two specific elements of the subject:

• Mapping outflows and inflows of workers in Denmark linked to production of finan-

cial services.

• Analysing causes and consequences for Danish workers and the Danish economy.

Table of contents

Executive summary 4

1 Introduction and background 8

2 Mapping the relocations of job functions in the Danish finance and IT sectors 12

2.1 Offshoring to countries with lower-paid workers: the

overall picture 12

2.2 Offshoring by services and functions 20

2.3 Employment for foreign workers in the financial and IT

sector 22

3 Causes and consequences for Danish workers and the Danish economy 31

3.1 A driving force being the rapidly changing financial sector

31

3.2 The structural drivers of offshoring 32

3.3 The level of competition in the financial sector is expected

to keep rising 36

3.4 Offshoring benefits some employees, but hurts others 38

3.5 Jobs at risk in coming years from increase in skill gap and

higher rate for wage taxes 40

References 42

List of figures

Figure 1 Danish import and export of financial and IT services ......... 8

Figure 2 GVA per employee and share of employees in sectors,

2014 ....................................................................................................... 10

Figure 3 Types of offshoring and total jobs offshored on a

cumulative basis, 2005-2016 ............................................................... 13

Figure 4 Estimated directly offshored jobs in the financial

sector, 2010 and 2016 .......................................................................... 15

Figure 5 Destinations of direct offshoring over time,

cumulative numbers ............................................................................. 16

Figure 6 Estimated indirectly offshored jobs from the financial

sector, 2010 and 2016 .......................................................................... 18

Figure 7 Destinations of indirect offshoring over time, ..................... 19

Figure 8 Offshoring by sub-branch to countries with a lower

wage ....................................................................................................... 21

Figure 9 Offshoring by function, 2017 ............................................... 22

Figure 10 Share of employed foreigners in chosen services,

2015 ...................................................................................................... 23

Figure 11 Foreign employees working in the Danish financial

sector .................................................................................................... 24

Figure 12 Country of origin of foreign employees in the

financial sector...................................................................................... 25

Figure 13 Functions of foreign employees and natives working ....... 26

Figure 14 Foreign employees in sub-sectors as a share of the

total employees in the sub-sector ........................................................ 27

Figure 15 Foreign employees in the IT sector as a whole .................. 28

Figure 16 Country of origin of foreign employees working in

the IT sector ......................................................................................... 29

Figure 17 Sector division of employees on

Forskerskatteordning ......................................................................... 30

Figure 18 Changes in the production of financial services in

several stages ....................................................................................... 32

Figure 19 Increasing lack of labour .................................................... 34

Figure 20 Wage tax as an extra tax on jobs in the Danish

financial sector...................................................................................... 35

Figure 21 The estimated effect on employment in the Danish

banking sector if the wage tax was kept at 12 per cent from

2015-2020 ............................................................................................ 36

Figure 22 A large increase in the share of jobs in the financial

sector being exposed to competition ................................................... 37

Figure 23 Wage consequences ............................................................ 39

Figure 24 Potential job losses from higher wage tax and skill

gap ......................................................................................................... 41

List of boxes

Box 1 Definition of Danish offshoring ................................................. 14

Box 2 Some facts about individual banks ........................................... 17

Box 3 Forskerskatteordningen 2017 ................................................... 29

4

Executive summary

A still more international financial sector

Denmark has a fairly large and well-functioning financial sector. It employs approximately

3 per cent of all employees in Denmark, but looking at the economic activity measured by

gross value added (GVA), the sector accounts for significantly more than that; 106 bn. DKK

which is about 6 per cent of national GVA, reflecting a highly productive sector with several

areas of competences, where Denmark has an international leading position.

The global sector is also becoming increasingly internationalised and digitalised. At the na-

tional level, this is seen from the increasing international trade in financial services where

Danish import and export of financial services have risen by 60 and 74 per cent from 2005

to 2016, respectively. It is worth noticing that the Danish financial sector has become an

important exporter with export growing more rapidly than import of financial services dur-

ing the same period. At the same time, we are observing both more offshoring of activities

to other countries and more inflow of workers to Denmark, often in specialized positions.

However, the ability of the sector to contribute to a high level of jobs and productivity in

Denmark is conditioned on well-designed framework conditions. In this context, the study

evaluates the extent and drivers of outsourcing from Denmark and discusses some of the

tax and educational policies that may have an impact on the future tendencies for offshor-

ing in the sector.

Digitalisation as a driver of outsourcing in the financial sector

Financial services become more and more digitalised and mobile, which enables financial

companies to produce their services more cheaply and effectively using international la-

bour and global chains of production. This happens both between industrialised countries,

through offshoring to low-cost countries and through influx of labour from abroad.

This has also led to an increasing degree of relocation of jobs in and out of Denmark: sev-

eral of the major Danish banks have already offshored parts of their labour to low-cost

countries, and more foreign employees are working in the Danish financial sector. Today,

more than 3,700 jobs related to the Danish financial sector are offshored to countries with

lower-paid workers. The tendency for offshoring seemed to start slowly in the early 2000s,

after 2010 it picked up speed, and from 2012 to 2014 the number of offshored jobs almost

doubled.

Still, when looking at the large reduction in the number of employees in the banking sector

in recent years, digitalisation and other factors still play a larger role than offshoring to low-

cost countries. These tendencies are clearly seen from the increasing import and export of

financial and IT services to the Danish financial sector, which especially increased a lot

after 2005.

Early in the period, most of the offshoring happened indirectly through long-run contracts

with large IT subsidiaries, having IT centres in distant low-cost countries such as India.

5

This typically involved computer programming and IT infrastructure in banks and insur-

ance companies. Most recently, the direct offshoring has increased much faster, partly at

the expense of indirect offshoring. Here both large and mid-sized banks started “near-shor-

ing”, opening back office centres in the new EU countries (typically Poland and the Baltics).

Offshoring benefits some employees but hurts others

When jobs are moved out of Denmark, it typically has negative consequences for Danish

production staff in low-knowledge areas.

It is primarily employees, who are exposed to competition that get dismissed and replaced

by labour abroad and, for many of these employees, finding a new job with the same wage

levels will take time. Specifically, we find that unemployment results in a 10 per cent wage

decrease in the following year for employees who do find new employment. Five years after

a spell of unemployment, wages are approximately 3 per cent lower than would have been

the case if the employment had continued. One of the drivers is that only around 40 per

cent find new jobs in the highly productive financial sector, and hence people do not nec-

essarily get a job that aligns completely with their skill set. On top of this, on average 38 per

cent do not find new employment quickly after losing their job.

The scenario is the inverse for highly educated employees working in knowledge-intensive

areas of Danish finance and IT companies. These employees become a part of the efficiency

improvements taking place in the companies and, hence, experience an improvement of

their wages when jobs are being offshored.

Highly specialized jobs being offshored

The offshoring of Danish jobs resembles the relocations experienced in the industrial sec-

tor, where the companies initially offshored production staff with low or medium educa-

tional attainment. Within the IT sector, these are jobs like web design and programming,

whereas for the financial sector these would be back office functions or standard IT func-

tions. These types of jobs have mainly been offshored to new EU countries including the

Baltics, but also to countries like India where the labour market functions relatively well,

but the wages are significantly lower than in Denmark.

More recently, offshoring also includes the development of new products and services re-

lated to high competence and more specialized functions. Specifically, IT development ac-

counts for approximately 47 per cent of all offshoring related to the financial sector. Our

analysis further suggests that compliance work related to avoiding money laundering as

well as payment service specialists account for approximately 10 per cent of Danish off-

shoring, design services account for 3 per cent, and project management and IT service

management account for 4 and 7 per cent respectively.

6

An increased influx of labour

The influx of labour has been increasing in the financial and IT sectors over the past eight

years – especially in the IT and banking sector. In total, the financial and IT sectors em-

ployed 6,600 foreign workers in 2008; today this number is around 7,700, where 2,700

work in the financial sector.

The influx of labour is mainly within areas where Denmark has a competence cluster – e.g.

asset management – and areas where the Danish labour market is in short supply. When

looking at where we import labour from, the picture is more scattered, but most foreign

employees come from other EU countries, other industrialised countries and developing

countries such as India and Pakistan.

Compared to many other knowledge-intensive industries, the IT sector is generally ahead

in the matter of influx of foreign labour. Concretely speaking, 11 per cent of people working

in the IT sector are currently foreigners. The financial sector is lagging behind with only 4

per cent foreign workers, while other knowledge-intensive sectors, e.g. architects and phar-

maceuticals, employ 9 and 10 per cent foreign workers, respectively.

The financial sector, however, employs relatively more highly skilled foreign employees –

especially in the most recent years and especially when it comes to people from other old

industrialised countries.

Specific Danish drivers of offshoring

In this study, we have focused on two potential drivers of offshoring in the Danish broader

financial sector that may push the tendencies for further offshoring in the coming years:

1. Lack of qualified labour.

2. The Danish wage tax on staff in the financial sector.

The lack of qualified labour in the IT sector is a major factor. A recent study found that

Denmark will experience a shortage of an additional 19,000 IT specialists by 2030. As the

financial industry employs a significant share of all current Danish IT specialists, the over-

all skill gap related to the financial sector alone may lead to a job loss of 1,500 by 2020.

This should be seen in the context of financial services becoming extremely IT intensive.

Furthermore, it will put an upward pressure on wages in the IT sector in Denmark as sev-

eral industries compete for scarce IT resources. Higher influx of labour from abroad is con-

tingent on legal constraints and could be an option to close skills gaps, but this option is

likely to be costly.

The already decided increase of the wage tax (lønsumsafgift) is also a factor. It is a type of

tax only existing in Denmark and a few other countries, including France and Norway. As

a consequence, it will be a factor when companies consider where to locate jobs, with Den-

mark being a more costly option. Given the expected continuing ability to shift production

away from the location of consumers to the lowest cost location of production, the wage tax

will have an increasing impact on offshoring. It has been decided to raise the tax rate from

12.2 per cent in 2015 to 15.3 per cent in 2021. We find that approximately 1,100 jobs may

be lost in the financial sector as result of that.

7

Summing up

Denmark has a strong and productive financial sector accounting for 6 per cent of GVA.

The sector is increasingly exposed to international competition in all value chains of pro-

duction and products. Both import and export of financial services are increasing. The dig-

italisation, which is a main driver of these tendencies, has also resulted in increasing

tendencies of offshoring as well as influx of workers from abroad. As a whole, this has been

beneficial for the sector and its customers.

However, for the sector to thrive in the coming years, supporting framework policies is cru-

cial. In this context, it will be important to address the skill gap of IT specialists in the

Danish educational system and find a replacement for the Danish wage tax on employees

in the financial sector. Potentially over 3,000 jobs are at risk, and Denmark risks losing

some of its international leading positions in different areas of the financial industry.

8

Chapter 1

1 Introduction and background

The Danish financial sector is becoming increasingly internationalised, digitalised and

new technology implies a higher mobility of jobs in the financial sector. This leads to an

increasing degree of relocation of jobs in and out of Denmark: several of the major Dan-

ish banks have already offshored parts of their labour to low-cost countries, and more for-

eign employees are working in the Danish financial sector.

At the national level, this is seen from the increasing international trade in financial ser-

vices. From 2005 to 2016, Danish import of financial services rose from 4.3 to 7.0 bn. DKK,

while Danish export of financial services rose from 3.8 to 6.9 bn. DKK: see Figure 1a. This

corresponds to an increase of 60 and 74 per cent, respectively. It is worth noticing that the

Danish financial sector has become an important exporter with export growing more rap-

idly than import of financial services during the same period.

Figure 1 Danish import and export of financial and IT services a) Danish national import and export of

financial services b) Import of IT and financial services in the

Danish financial sector

Note: Financial services here also include insurance services. Panel a) shows the total import and export of

financial services in the Danish economy, while panel b) shows the total import of IT and financial

services, from input-output tables, for the IT and financial sector, respectively.

Source: Statistics Denmark

Further, we see increasing imports of financial and IT services to the Danish financial sec-

tor: from 1990 to 2005, imports of financial services to the sector have been more or less

stable – after this there was a significant increase, and in 2015 imports were more than

double those in 2005: see Figure 1b. For direct imports of IT to the Danish financial sector,

the numbers are significantly lower, but here the increase already began in the late 1990s.

Because of this trend, the Danish financial sector is also exposed to increased competition

and the need for operational optimisation and specialisation. For Danish financial firms,

this has changed the international division of labour through three main channels:

-

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

Import Export Import Export

2005 2016

Import and export, million. DKK, 2015-

0

0,5

1

1,5

2

2,5

1990 1995 2000 2005 2010 2015

IT and information services Financial services

Import, bn. DKK, 2015-prices

9

1. International division of labour between industrialised countries: The

large banks (Danske Bank and Nordea) have reorganised and centralised their pro-

duction of financial services in expert centres – some are in Denmark and others

can be found in other Nordic countries. There is also a trend towards collaboration

and outsourcing of service production to specialized international banks.

2. Direct offshoring to countries with lower-paid workers: Especially in re-

cent years, Danish banks and to some extent supporting financial companies have

started to move the production of financial services to countries with lower-wage

workers. The direct offshoring can be through the purchasing of consultancy ser-

vices from external foreign companies or by establishing internal divisions of sub-

sidiaries in other countries.

3. Indirect offshoring to countries with lower-wage workers: The core IT in-

frastructure of financial companies has, for many years, been outsourced and pro-

duced by IT companies. Other IT services have been outsourced as well (some in-

sourced again in recent years). The IT sector is generally ahead of the financial sec-

tor in terms of international division of labour and so a significant share of offshor-

ing from the financial sector happens indirectly.

In the next chapter, we will focus on both offshoring to countries with lower-wage employ-

ees, both directly and indirectly (point 2 and 3 above) and the inflow of jobs from abroad

to the Danish financial sector.

Healthy and unhealthy developments

The jobs that disappear in Denmark are only to some extent replaced by new jobs higher

up in the value chain. Part of this happens as a consequent of “sound” international divi-

sion of labour. In particularly, non-core finance jobs are outsourced, and less demanding

financial jobs are relocated to countries where production is cheaper. It ensures competi-

tive prices for Danish companies and households, growth and prosperity in Denmark.

Another part is unhealthy for the Danish economy and heavily influenced by weak frame-

work conditions in Denmark; inappropriately high taxation of labour in the Danish finan-

cial sector, insufficient focus on educating enough IT and financial specialists, and poor

conditions when it comes to attracting international specialized labour. Hereby jobs are

relocated for the wrong reasons, namely because Danish financial companies are unable

to recruit the right employees – even though their willingness to pay is not lower than in

other countries.

At this point, special national taxes such as the Danish payroll tax are very distorting in an

international sector and job market and are undoubtedly contributing to the relocation of

jobs, we see today. The payroll tax was introduced in the 1980s, where the job mobility in

the sector was much lower. Nevertheless, the payroll tax rate is still increasing.

In chapter three, we will go more into details about how the Danish payroll tax, a lack of

specialized labour and other factors are driving the tendencies for offshoring the financial

sector.

10

Denmark has a lot to lose

Denmark has a lot to lose from such unsuitable and uncompetitive framework conditions.

The sector ensures essential functions in society; a well-functioning payment system,

households' terms on mortgages, pension savings and, perhaps even more important, that

Danish companies have the right access to capital, risk hedging, etc. As such, the whole

economy benefits from a well-functioning financial sector.

Denmark has a fairly large and well-functioning financial sector. Nationally, it employs

approximately 3 per cent of all employees in Denmark, but looking at the economic activ-

ity measured by gross value added (GVA), the sector accounts for significantly more than

that; 106 bn. DKK which is about 6 per cent of national GVA. Hence, in comparison with

other sectors, the financial sector has the absolute highest GVA per employee, see Figure

2. This illustrates how important the value-creation of employees in the sector is for the

rest of the economy.

Figure 2 GVA per employee and share of employees in sectors,

2014 Ds

Note: Others include 1) agriculture, 2) real estate, 3) culture, leisure and other services.

Source: Sector-divided national accounts.

Compared to other countries, the strength of the Danish financial sector is to a large ex-

tent driven by our large pension wealth of about 3,500 billion DKK. It gives rise to exten-

sive investment activity and the need for associated services from lawyers, auditors and

other advisers. At the same time, we are currently developing a number of new innovative

technologies for financial services (Fintech), which underlines the current opportunities

for the Danish financial sector. For the sector to keep developing these areas, the frame-

work conditions are crucial and dependent on international competition.

11

Paradoxically, “sound” international division of labour helps the Danish financial sector

to sustain and create new jobs higher up in the value chain, while unhealthy develop-

ments may imply that Denmark will lose its leading positions in certain areas of finance.

In the last part of chapter three, we will discuss the cost of unhealthy international divi-

sion of labour for the Danish economy.

12

Chapter 2

2 Mapping the relocations of job functions in the Danish finance and IT sectors

International division of labour is an increasingly common phenomenon in most indus-

trialised countries and has been so since the beginning of the 1980s. In this chapter, we

analyse the offshoring and outsourcing in the financial sector during the last decade.

We start by analysing how Danish jobs are being offshored to a number of low income

countries (Section 1.2). Further, we look at how offshoring happens broadly across services

for a broad range of specialized areas (Section 1.3). Finally, job markets are becoming more

mobile and Danish financial institutions have a greater influx of foreign employees. This

will be analysed in the last section (Section 1.4).

2.1 Offshoring to countries with lower-paid workers: the

overall picture When analysing the number of jobs offshored, it is important to have a clear definition of

the concept. Offshoring from the Danish financial sector is defined as employees working

in countries with lower wages but serving Danish customers of financial companies domi-

ciled in Denmark: see Box 1. This may both happen through local branches and subsidiaries

– as seen lately for the larger banks in the Baltics and Poland – and through local sub-

contractors and consultancy firms – as is more typical for smaller banks and operations in

distant countries (India especially).

Using a number of different sources, we find that more than 3,700 potential Danish jobs

are currently being directly and indirectly offshored to countries with lower-paid workers:

see Figure 3a1. The offshoring trend seems to have started slowly in the early 2000s, while

growing rather slowly in the years from 2007 to 2010. Thereafter, it increases quite fast

especially from 2012 to 2014 where the number of offshored jobs almost doubles. These are

even quite conservative estimates.

A large part of the increase in offshoring over the period is driven by direct offshoring, es-

pecially related to large banks and supporting financial companies (BEC, NETS etc.). The

indirect offshoring grows much slower over the period, and for some years it even de-

creases. This mostly relates to the financial sectors’ core IT infrastructure, offshored

through sub-contractors, typically being larger IT companies, not specifically related to fi-

nance (IBM, CSC, NNIT etc.). This trend for outsourcing started back in the 1970s, but in

some cases, this trend has been reversed as some larger banks are insourcing functions, but

locating them in low-cost countries.

1 See Box 2 for estimation techniques and data sources

13

Figure 3 Types of offshoring and total jobs offshored on a cumu-

lative basis, 2005-2016 a) Types of offshoring of financial services b) Jobs in the Danish financial sector relative

to jobs offshored

Note: Figure 2a) shows a rough estimate of the accumulated number of jobs offshored based on a number of

data sources. For Nordea and Danske Bank, we assume that 30 and 65 per cent of the banks’ activities,

respectively, are related to Denmark. The numbers are quite uncertain, especially the indirect offshoring

and the numbers from before 2009. In Figure 2b) other financial services include different types of

supporting companies, capital and investment funds and other services.

Source: Panel a): Register data on foreign service trade, yearly accounts of a number of banks, an interview

study and Oxford Research (2012). Panel b): Statistics Denmark

Today, the total offshoring from the financial sector relates to about 4 per cent of the total

employment in the Danish financial sector: see Figure 3b. The increasing tendencies for

offshoring kicks in at the same time as the number of employees in the Danish financial

sector decreases relatively fast. However, the offshoring tendencies only add up to a minor

share of the overall decrease in employees in the Danish financial sector. The increasing

digitalisation may explain a significantly larger share.

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

Indirect offshoring

Direct offshoring

Total offshoring

Total jobs offshored

1%

1%1%

2%3% 4%

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

90.000

100.000

Other financial services

Pension and insurance

Credit institutions

Banks

Total Danish jobs

Total jobs including offshoring

Total number of jobs Share of jobs

offshored

14

Box 1 Definition of Danish offshoring

In this study, we define jobs offshored from Denmark as jobs set up in countries with lower-

paid workers to serve Danish customers of financial companies domiciled in Denmark. Im-

portantly, for the large international banks, the Danish market is only a share of their business

and, hence, only a part of their employees in countries with lower-wage workers serve their

Danish consumers. Based on turnover, we assume that 65 per cent of Danske Bank and 30

per cent of Nordea is related to Danish customers. These are conservative estimates.

The jobs offshored may not correspond to business functions previously handled by Danish

employees. For example, as a result of increasing use of internet banking and mobile apps,

several banks have opened new IT centres in India, Poland and other countries. The jobs in

these centres do not correspond to previous business functions in Denmark, but they are still

serving Danish consumers of Danish banks. Had the banks not offshored these, and if the

supply of IT skills was there, these jobs could potentially have been set up in Denmark.

Our distinction between direct and indirect offshoring is based on whether the offshoring oc-

curs directly in a Danish financial company (defined by their branch codes in Statistics Den-

mark’s registers) or through a Danish IT company delivering services to the financial sector.

However, the distinction between what is part of the financial sector and what is IT is not

clear-cut. For example, companies like NETS, SDC and Bankdata are part of the financial

sector (supporting financial services), while JN Data is part of the IT sector.

In this study, we generally do not distinguish between intercompany job relocation, where a

Danish company establishes a branch or subsidiary in a country with lower wages, and situa-

tions where Danish companies buy services from a sub-contractor set up in a country with

lower wages (on a consultancy basis).

Source: Copenhagen Economics

Direct offshoring from the financial sector

We find that so far, a little over 3,000 jobs have been directly offshored from the financial

sectors. A relatively large number of these have been offshored to India, and this has been

the case for many years, whereas Lithuania and Poland have also become popular destina-

tions for offshoring more recently: see Figure 4 and Figure 5.

15

Figure 4 Estimated directly offshored jobs in the financial sector,

2010 and 2016

Note: The numbers used are approximate, rounded up and quite uncertain. The numbers only relate to the

Danish market: see Box 1

Source: Appendix A

Direct offshoring of IT in the banking sector

A large part of direct offshoring is driven by the banking sector and, in particular, by the

large banks. Nordea, Danske Bank and Nykredit all started offshoring IT jobs to India in

the early to mid-2000s, and Jyske Bank from 2008: see more details in Box 2. In the early

phase this was only done through Danish and international consultancy companies, while

Danske Bank has started to in-source their Indian IT employees in recent years. Today,

Danske Bank has the largest IT back office in India (among the Danish banks) with more

than 800 people (where it is estimated that around 65 per cent are serving Danish custom-

ers). Later, some of the smaller and regional banks, i.e. SEB Denmark, Spar Nord, and Saxo

Bank also started offshoring IT functions to India. As far as we know, all these banks still

offshore IT to India today.

Nearshoring of both IT and back office functions in the banking sector

Nordea also had some IT activities in Poland in the mid-2000s, but (as far as we know) had

not established an actual IT centre and were not very successful. Nykredit started a pilot

project in Poland in 2005.

However, from around 2009, Nordea and Danske Bank both started nearshoring more sys-

tematically. Danske Bank started offshoring to Vilnius in Lithuania where they already had

a relatively large retail bank and good experience with the job market. In the first year, the

process happened relatively slowly –this is possibly because Dansk Bank first needed to

16

know the Lithuanian market better and how to work in global teams. In 2012 they estab-

lished a back-office centre; Danske Bank Global Services Lithuania (GSL), and in 2014 an

IT centre; Danske Bank Global IT Lithuania (DGITL). Both centres grew quickly in the first

couple of years. Nordea has an operation centre in Lodz, Poland and IT departments in

Gdansk and Gdynia, where they previously also had a large retail department (now sold off

to the Polish PKO bank).

For both banks, the number of employees in the new EU countries increased slowly at first

but have increased more quickly in recent years, especially from around 2012: see Figure

5. Nykredit established an IT centre in Warsaw, Poland, but given the smaller size of

Nykredit compared to Nordea and Danske Bank, this centre was also much smaller in scale.

Figure 5 Destinations of direct offshoring over time, cumulative

numbers

Note: The figure shows our rough estimates based on a number of data sources. For Nordea and Danske

Bank, we assume that 30 and 65 per cent of the banks' activities, respectively, are related to Denmark.

These are conservative estimates.

Source: See appendix A

Banks offshoring to other destinations

We also see some degree of offshoring to other countries:

• We saw a relatively large degree of offshoring to the Czech Republic, Slovenia and Slo-

vakia in 2010-12, but this has since decreased, which may indicate that this was on a

shorter-term consultancy basis.

• For the other two Baltic countries, there has been an increasing degree of offshoring

from 2013. To our knowledge, this is partly related to Danske Bank, which has some

global back-office functions in Lithuania. Nordea has also established a call centre in

Estonia, mostly to serve their Finnish customers.

• We also see a trend in offshoring to Cyprus and Malta, equivalent to around 30-60 em-

ployees after 2009.

0

500

1.000

1.500

2.000

2.500

3.000

3.500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Lithuania Poland

India Other Baltics

Other new EU countries Pakistan, Ukraine and Gibraltar

Direct offshoring, total

Jobs offshored

17

• Jyske Bank and Nordea have some operations on Gibraltar, especially the former. Jyske

Bank has around 100 employees there, but not all of them serve the Danish market.

Box 2 Some facts about individual banks Danske Bank:

▪ Early on, Danske Bank established a consultancy-based centre in Bangalore, India,

through a company called ITC Infotech. In 2006 they had 40 employees working for

Danske Bank in India. However, in recent years Danske Bank started insourcing the

Indian consultants, and today most of their operations are managed internally in

Danske Bank. Originally, Danske Bank started in India because of lack of resources

in Denmark, but later scaling and cost efficiency have also become large factors.

▪ In 2009, Danske Bank started a back office and IT centre in Vilnius, Lithuania. This

was mostly developed from 2012 and onwards.

▪ Danske Bank has their IT infrastructure outsourced partly to IBM and partly to NNIT.

Since IBM have many employees in India and NNIT has some in China, the Philip-

pines and the Czech Republic, this probably involved a large share of indirect off-

shoring.

Nordea:

▪ Nordea started an operation centre in Lodz, Poland in 2010. In the beginning this

was part of Nordea’s local bank in Poland. The local bank was sold off to PKO Bank

in 2014, but Nordea has kept and expanded their operation centre in Poland. Today,

Nordea also has an IT department in Gdansk and Gdynia, Poland. Nordea has also

established a call centre in Estonia, mostly to serve their Finnish customers.

▪ In 2006 Nordea outsourced large IT projects to an external IT company, Capgemini,

where much of the production happened in Mumbai, India.

▪ From 2003 to 2014, Nordea’s IT infrastructure was managed by a joint venture com-

pany with IBM: Nordic Processor. Since IBM has many employees in India, this prob-

ably involved a large share of indirect offshoring. However, from 2014 Nordea started

insourcing their IT infrastructure in order to gain full control of their IT, to have

better synergy in their IT services and shorten delivery times.

Jyske Bank:

▪ Jyske Bank has a branch in Gibraltar with approximately 100 employees. Some of

them serve local bank customers, but most of them serve Danish consumers.

▪ In spring 2008, Jyske Bank established an IT development centre in India (in Gurgau,

near Delhi), starting with 10 employees. This was done on a consultancy basis

through the company 7N.

▪ Before 2008, Jyske Bank also saw IT development in Poland. Their move to India

was mostly done to cut costs compared to Poland.

Nykredit:

▪ Nykredit started offshoring IT functions to India in the early 2000s, but later on they

started nearshoring to an IT development centre in Warsaw, Poland, in 2005 – at

first with 5-10 employees, then around 15 in 2012. By 2014 they had 60 consultants.

Source: See Appendix A

18

Offshoring of other financial IT services

Other supporting financial services such as NETS, Bankdata and SDC have also undertaken

direct offshoring in the financial sector. In total, our estimates suggest that they have a little

over 500 employees offshored, primarily to India, Romania and Poland.

Indirect offshoring to countries with lower-paid workers

For indirect offshoring from the financial sector, the destinations are more widespread and

distant, and here we find a total of around 700 jobs offshored indirectly in 2016, see Figure

6. The amount of indirect offshoring has been decreasing in recent years, partly at the ex-

pense of more direct offshoring. That said, given the indirect characteristics, the numbers

are very uncertain: see estimation methods in Appendix A.

Figure 6 Estimated indirectly offshored jobs from the financial

sector, 2010 and 2016

Note: The numbers used are roughly rounded up and insecure

Source: Appendix A

Indirect offshoring through large IT companies

For many years, the IT infrastructure for banks and other financial companies has been

outsourced to IT consultants or combined financial-IT houses. Offshoring to India and

other countries has been going on for many years, especially for large international IT con-

sultants. This is also why the indirect offshoring from the financial sector takes up a much

larger share early in the period and has been more stable over the years compared to direct

offshoring: see Figure 7.

19

Nordea and Danske Bank both started large agreements with IBM from 2003 and 2004.

Nordea did this by establishing a joint venture company together with IBM (Nordic Pro-

cessor APS), but Nordea has recently in-sourced their IT infrastructure. Danske Bank has

extended part of their agreement with IBM and started another contract with NNIT.

Indirect offshoring through joint venture with smaller banks

Jyske Bank and Nykredit established a joint venture IT company together in 2003 called

JN Data. Bankdata is another joint venture IT company. Other banks and insurance com-

panies have used CSC and KMD.

Figure 7 Destinations of indirect offshoring over time,

cumulative numbers

Note: The figure shows our rough estimates based on a number of data sources. For Nordea and Danske

Bank, we assume that 30 and 65 per cent of the banks’ activities, respectively, are related to Denmark

Source: Register data on foreign service trade, yearly accounts of a number of banks, interview study and Oxford

Research (2012)

0

100

200

300

400

500

600

700

800

900

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Other countries Balticum and other new EU countries

Poland India

Indirect offshoring, total

Jobs offshored

20

Key findings from Section 2.1:

✓ Today, more than 3,700 potential Danish jobs are offshored to lower-cost countries, mostly directly through the banking sector.

✓ The tendency for offshoring seems to start slowly in the early 2000s. After 2010 it picks up speed, and from 2012 to 2014 the number of offshored jobs almost doubles.

✓ Early in the period most of the offshoring happened indirectly through large IT subsidiaries, having large IT centres in distant low cost countries such as India. More recently, the direct offshoring has increased much faster and partly at the expense of indirect offshoring. Here large banks have started IT and other back office centres, typically much closer in the new EU countries.

✓ When looking at the large reduction in the number of employees in the banking

sector in recent year, digitalisation and other factors still play a larger role

than offshoring to low-cost countries.

2.2 Offshoring by services and functions Generally, there has been large changes in the types of jobs offshored in the mid-2000s as

compared to today, both in the IT and financial sector. Earlier, low-cost countries were

mostly used for less demanding and specialized jobs, while today offshoring happens across

many different services and functions.

Offshoring in the IT sector is mostly related to computer programming but is

also related to many other services

Within the IT sector, most offshoring is related to computer programming: see Figure 8.

The share of offshoring of consultancy services related to information technology between

2005 and 2010 increased in the period from 2011 to 2015. Meanwhile firms working in

computer facility management were offshoring to a much larger extent from 2005 to 2010

compared with the period between 2011 and 2015.

In the financial sector it is mostly banks that have been offshoring

From 2005 to 2010 banks were responsible for 20 per cent of total offshoring, and more

recently 58 per cent from 2011 to 2015. The pension and insurance companies seem to have

slowed down their offshoring activities. Specifically, the pension and insurance firms made

up 25 per cent of total offshoring from 2005-2010, compared to only 5 per cent from 2011

to 2015.

21

Figure 8 Offshoring by sub-branch to countries with a lower wage Offshoring by sub-branch within the IT sector

Offshoring by sub-branch within the financial sector

Note: The figures are based on offshoring to countries with lower wages. Other includes different types of

supporting companies, capital and investment funds and other services.

Source: Copenhagen Economics based on register data from Statistics Denmark

Today highly specialized jobs are being offshored

IT development accounts for approximately 47 per cent of all offshoring: see Figure 9. Our

analysis further suggests that compliance staff employed to avoid money laundering and

payment service specialists account for approximately 10 per cent of Danish offshoring and

design services for 3 per cent. Furthermore, project management and IT service manage-

ment account for 4 and 7 per cent, respectively. We generally observe that the composition

of IT functions abroad looks very similar to the functions in Denmark, yet with small dif-

ferences, e.g. slightly more project management in Denmark.

49%

9%

31%

7%4%

2005-2010

Computer programming

Consultancy services for information technology

Computer facility management

Other IT services

Data handling, webhosting and similar services

43%

32%

14%

9%

3%2011-2015

Computer programming

Consultancy services for information technology

Computer facility management

Other IT services

Data handling, webhosting and similar services

32%

14%29%

20%

5%

2005-2010

Other Other credit services

Pension and insurance Banks

Mortgage banks

29%

7%

5%

58%

1%

2011-2015

Other Other credit services

Pension and insurance Banks

Mortgage banks

22

Figure 9 Offshoring by function, 2017


Traditionally, jobs further down the value chain were offshored

As the financial services are becoming more and more digital, administrative tasks that

were traditionally made manually are quickly becoming IT-driven. So, when financial in-

stitutions offshore administrative tasks, they are at the same time becoming automated.

This implies that jobs that were labour intensive are now better characterised as IT tasks.

It is these jobs that have been traditionally offshored.

Today competences play a larger role

Today the picture is different and financial institutions are now also offshoring highly spe-

cialized processes: see e.g. Figure 9. Our interview study reveals that it is increasingly dif-

ficult to find the right specialists in Denmark and highly productive jobs are being offshored

or created abroad. Examples include JAVA developers, payment service specialists and

money laundering experts.


✓ Today, most of the offshoring in the financial sector is related to banks, while

for the IT sector it is related to computer programming.

✓ Compared to the mid-2000s where offshoring mostly related to standardized

back office functions, it is now also related to the high competence and more

specialized functions.

2.3 Employment for foreign workers in the financial and IT

sector Compared to many other knowledge-intensive industries, the IT sector is generally ahead

in the influx of foreign labour: see Figure 10. This is particularly due to the lack of supply

2%

3%8%

47%9%4%

8%

3%

7%4%

3%1%

Specialists in payment services Design

Money laundering specialists IT Development

Business Development Project Management

IT Operations Architects

IT Service Management Infrastructure

Test Management Security

23

of IT skills in Denmark. The financial sector is also behind compared to architects and phar-

maceuticals – both knowledge-intensive sectors where Denmark has a leading role.

Figure 10 Share of employed foreigners in chosen services, 2015

Source: Statistics Denmark and Copenhagen Economics

An increased influx of labour in the financial sector

Foreign employees account for a rather small but increasing share of the jobs in the finan-

cial sector. In 2015, there were about 2,700 foreign employees working in the financial sec-

tor, equal to around 3.5 per cent of the total employment in the sector. The number of for-

eign employees working in the sector has steadily increased by around 3.5 per cent per year

since 2009, even though the total number of employees in the financial sector has de-

creased over the period: see Figure 11.

Highest influx of employees from EU countries

When we look at country of origin, almost 43 per cent of the foreign employees come from

other “old” industrialised countries, 18 per cent come from new EU countries (including

Russia and Ukraine), while about 39 per cent come from emerging markets. Figure 12

shows a more detailed distribution.

0%

2%

4%

6%

8%

10%

12%

14%

16%

Share

24

Most foreign employees are middle-aged

Most foreign employees in 2015 are between 30 and 54 years old, while another 21 per cent

are younger than 30: see Figure 11b. When we exclude foreign employees from conflict

zones and non-industrialised countries, this share under 30 years old is even lower. This

may indicate, that most foreign employees employed today come with some work experi-

ence from their home country. This trend has changed to some degree. In 2008, the share

of foreign employees employed under 30 years old was nearly 30 per cent.

The gender distribution is close to 50-50. There are slightly more men when we exclude

foreign employees from conflict zones and non-industrialised countries, but only slightly.

This has also remained constant over the years.

All groups have grown since 2009, and the new EU countries have grown more substan-

tially (at around 4.7 per cent per year). This mostly relates to the Baltics as well as Bulgaria

and Romania. In the emerging markets, especially the number of foreign employees from

India has increased a lot (part of “other emerging markets” in Figure 12). For most other

countries, the share has remained almost unchanged.

Figure 11 Foreign employees working in the Danish financial sec-

tor a) Number of foreign employees employed b) Share of total foreign employees in the working

sector, 2015


2.424 2.227 2.296

2.583 2.728

-

500

1.000

1.500

2.000

2.500

3.000

2008

2009

2010

2011

2012

2013

2014

2015

Old industrialised countriesNew EU countries, Russia and UkraineEmerging markets

Number of foreign employees

Under 30,

21%

Women, 49%

30-44,53%

Men, 51%

45-54,19%

Over 54, 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Age Gender

3.5% 3.3%

2.9% 2.7% 2.8%

25

Figure 12 Country of origin of foreign employees in the financial

sector 2008

2015


Foreigners hold high-level positions

Unsurprisingly, significantly more foreign employees from old industrialised countries oc-

cupy high-level jobs and chief executive positions (over 50 per cent in 2015): see Figure 13.

Foreign employees from emerging markets and new EU countries mostly occupy ground

and middle-level jobs and almost no chief executive positions. This may indicate that for-

eign employees from other industrialised countries often are headhunted by Danish com-

panies and move to Denmark only because of the specific position. This is far from always

the case for other foreign employees.

Scandinavia, 17%

Germany and UK,

16%

Other industrialised

countries, 13%

Baltics, 2%Poland, 8%

Other new EU

countries, 2% Russia and Ukraine, 5%

Bosnien-Hercegovina, 4%

Iran and Irak, 7%

Other conflict zones, 5%

Parkistan and Turkey, 7%

China, 4%

Other emerging

markets, 11%

Other,

37 %

Scandinavia, 17%

Germany and UK,

13%


countries, 13%


Other new EU


Bosnien-

Hercegovina, 4%

Iran and Irak, 7%Other conflict zones,

5%Parkistan and

Turkey, 7%China, 4%

Other emerging

markets, 12%

Other,

39 %

26

Figure 13 Functions of foreign employees and natives working

in the financial sector, 2008 vs. 2015

2008 2015

Note: Old industrialised countries include France, Germany, United Kingdom, Netherlands, Italy, Spain,

Sweden, Norway, Island, Hungary and USA.


Compared to 2009, foreign employees are significantly more likely to occupy high-level

jobs. In 2008, only 10 to 15 per cent of foreign employees occupied high-level jobs, while in

2015 the number is more than 40 per cent. First, this indicates how digitalisation and in-

creasing offshoring means that, in general, jobs in the Danish financial sector are now more

high-level and specialized. Many previously routine jobs are either digitalised or moved to

countries with lower-paid workers. In some areas, especially in IT, Danish financial com-

panies have a hard time finding the right qualified native Danish employees and, therefore,

have to employ people from abroad.

A significant increase in the number of high-level jobs happened just after the economic

crisis (from 2008 to 2010). This may be due to the rather sudden increase in financial reg-

ulation (CRD 4 etc.), whereby banks and credit institutions were forced to hire experts in

risk analysis. From the interviews, banks report that the availability of risk experts was very

low in Denmark at this point, which is why they had to find people with the skills elsewhere.

Where in the financial sector?

In the financial sector, other financial services (such as capital and investment funds and

different supporting companies) is the sub-sector with the highest share of foreign employ-

ees; around 7 per cent in 2015 (almost equally distributed between Western and non-West-

ern countries): see Figure 14. Banks, other credit institutions, pensions and insurance all

have around a 4 per cent foreign employee workforce (also nearly equally distributed be-

tween Western and non-Western countries). Since 2008, banks, other credit institutions

0%

20%

40%

60%

80%

100%

Other Ground level Middel level High level Chief executive

Share of foreign employees with working in sector

27

and other financial services have seen some increase in the share of foreign employees (be-

tween 0.7 and 0.9 per cent).

Figure 14 Foreign employees in sub-sectors as a share of the total

employees in the sub-sector

Note: Other financial services include different types of supporting companies, capital and investment funds

and other services.


Also an increased influx of labour in the IT sector

The number of foreign employees in the IT sector is significantly higher than for the finan-

cial sector, even though the sector is significantly smaller. In 2015, more than 5,000 foreign

employees were working in the IT sector, which equals about 9 per cent of the total number

employed: see Figure 15.

Similar countries of origin in both the IT and finance sector

When we look at country of origin, the overall picture is not much different from the finan-

cial sector. Although, when we look at the details, other emerging markets take up a partic-

ularly large share (32 per cent in 2015): see Figure 15, panel a. This mostly indicates that a

large share of foreign employees is from India, which is the single country with by far the

biggest immigration share. See Figure 16 for a more detailed picture.

All groups have increased since 2009, but especially the share from the Baltics. Other new

EU countries and India have increased a lot, and especially in the most recent years. From

2013 to 2015, the number of foreign employees working in the IT sector from new EU coun-

tries increased by 20 per cent per year, while the number from India increased by 16 per

cent per year.

1,3% 1,6% 1,7%2,9%

1,6% 1,9% 2,1%3,4%

1,8%2,1% 1,6%

3,3%

2,5%2,5% 1,6%

3,6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Non-western countries Western countries

Share of total imployees

2008 2015

28

Figure 15 Foreign employees in the IT sector as a whole a) Number of foreign employees b) Share of total foreign employees, 2015

Note: Compared to Figure 6 and Figure 7, this figure includes the whole IT sector in Denmark – not only the

part related to the financial sector. As a rough estimate using input-output tables, suggest that a bit

over 10 per cent of the IT services produced in Denmark is sold to the Danish financial sector.


Compared to the financial sector, the IT sector employs more people under the age of 30

and mostly men (as it is for the IT sector in general): see Figure 15b.

More than half of all foreign employees hold high-level jobs

When we look at job functions, the IT sector is ahead of the curve compared to the financial

sector. In 2008, a little over half of all foreign employees in the IT sectors were hired in

high-level jobs, and this was the same picture for all countries of origin (emerging, new EU

and old industrialised). In 2015, the picture has in fact shifted as compared to the financial

sector, such that emerging markets and new EU countries have an even higher share of

high-level jobs (65 per cent and 56 per cent, respectively), while the share is unchanged for

old industrialised countries.

Compared to the financial sector, this indicates a clear lack of the right IT competences in

Denmark, as has been pointed out in earlier studies, as discussed below. Furthermore, this

may also explain much of the offshoring in the IT sector that we have seen. When compa-

nies in Denmark have to import a very large share of their employees, which is made diffi-

cult by high Danish taxation, it may be easier and cheaper to offshore.

3.084 3.137 3.558

4.273

5.055

0

1.000

2.000

3.000

4.000

5.000

6.000

2008 2009 2010 2011 2012 2013 2014 2015

Old industrialised countriesNew EU countries, Russia and UkrainEmerging markets

8.0%

6.9%6.4%6.2%

Under

30, 31%Woman,

29%

30-44,

51%

Men,

71%

45-54, 13%

Over 54,

5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Age Gender

9.1%

29

Figure 16 Country of origin of foreign employees working in the

IT sector 2008

2015


Still a large share of foreign employees in key positions in the financial sector

The financial sector employs a large share of employees on the so-called Forskerskatte-

ordning – a reduced income tax scheme for well-paid, specialized foreign employees. The

financial sector employees 10 per cent of all employees using the scheme: see Figure 17.

This is a large share given that the financial sector only makes up 6 per cent of the Danish

economy.

Box 3 Forskerskatteordningen 2017

Facts on Forskerskatteordning:

• Researchers and high-wage employees recruited abroad can under certain conditions re-

duce taxes to 26 per cent for up to 5 years. • The reductions can be used by employees in every sector and by both foreign and Danish

employees as long as they have not received income in Denmark for the past 10 years • In order to be included in Forskerskatteordning, the high-wage employee must have an

average monthly wage of 63,700 DKK or more.

Source: SKAT

Scandinavia, 12%

Germany and UK,

16%


countries, 19%

Baltics, 1%

Poland, 6%

Other new EU countries, 3%Russia and Ukraine, 3%

Bosnien-Hercegovina, 3%

Iran and Irak, 6%Other conflict zones, 2%Parkistan and Turkey, 6%China, 5%

Other emerging

markets, 19%

Other,

41%

Scandinavia, 10%

Germany and UK,

14%


countries, 18%


Other new EU


Bosnien-Hercegovina, 3%Iran and Irak, 5%

Other conflict zones, 3%Parkistan and Turkey, 4%China, 4%

Other emerging

markets, 20%

Other,

39 %

30

Figure 17 Sector division of employees on Forskerskatteordning

Note: The numbers exclude scientists working in education. *) Since employees can work in more than one

sector at the same time the category other is not the simple residual.

Source: Skatteministeriet: http://www.skm.dk/skattetal/statistik/generel-skattestatistik/bruttoskatteordnin-

gen-for-forskere-og-noeglemedarbejdere-fakta-og-statistik


✓ The IT sector is generally in the lead when it comes to import of foreign labour.

✓ The import of foreign labour to the finance and IT sector sums up to around

2,700 and 5,000, respectively, and the employees come from both close to dis-

tant countries, within and outside of the EU. Accounting for the part of IT ser-

vices sold to the financial sector, this seems almost as large as the financial

sectors' offshoring to low-cost countries.

✓ This tendency for foreign workers has increased quite a lot in recent years --

especially in the IT and banking sector and especially workers from India, the

Baltics and other new EU countries.

✓ Foreign workers often occupy highly qualified jobs -- especially in the most re-

cent years and especially when it comes to people from other old industrialised

countries working in the financial sector. The financial sector occupies a large

share of all foreign workers on the Danish "forskerskatteordning".

Mining and quarrying, 10%; 387

Manufacturing,

25%; 922

Wholesale and retail

trade, 14%; 522Information and

communication, 06%; 231

Financial services,

10%; 384

Liberal, scientific and technical

services, 19%; 719

Administrative services and

help services, 11%; 396

Other*

31

Chapter 3

3 Causes and consequences for Danish workers and the Danish economy

The increasing international division of labour is driven by a rapidly changing financial

sector that is becoming increasingly digitalised. This creates an opportunity to move pro-

duction to minimise costs and compensate for the lack of qualified domestic labour.

We start by discussing how the financial sector is changing and how this change has been

a driving force for offshoring (Section 2.2). Next, we analyse why financial institutions are

offshoring (Section 2.3). We find two prominent drivers of offshoring and analyse them in

detail, namely the lack of qualified labour and the so-called wage tax. This should be seen

in the light of increasing offshoring in the financial sector going forward (Section 2.6). Next,

we analyse the consequences for employees who become unemployed (Section 2.7) and end

by giving some rough estimates of the consequences for the Danish economy (Section 2.8).

3.1 A driving force being the rapidly changing financial sector The structures of the financial sector are changing. The rapidly growing digitalisation of the

financial sector, sometimes led by FinTech startups, is changing the incumbent financial

sector with alternative digital services in almost every domain of the traditional sector. This

is everything from money transfer, raising equity, lending activity, trading platforms, fi-

nancial advice, etc. These digital advances have the potential to change the whole value

chain of the financial sector.

Digitalisation and centralisation have been the driving force

The changing value chain is making offshoring more beneficial and has happened in mul-

tiple steps starting from centralising administrative tasks and ending up with core services

being offshored, cf. Figure 18.

To begin with it has made financial institutions gather their production in headquarters,

close regional branches and outsource IT tasks to subcontractors.

In the early 2000s, many newly created IT jobs in the financial sector were outsourced to

Danish subsidiaries. In other words, digitalisation transformed traditional banking services

into digital services that were primarily handled by Danish IT consultants and then later

offshored.

More recently, the trend is toward insourcing, where Danish financial institutions have

started to create subdivisions abroad to ensure a more stable flow of services and ensure

that employees have the right skill sets. A prime example is Danske Bank’s activities in In-

dia and Lithuania. Danske Bank has bought IT services from India for decades, but tradi-

tionally used external consultants organised by large IT consultancies (like L&T Technology

32

Services or TCS). However, more recently, as IT services are becoming specialized, Danske

Bank have chosen to have IT services made in-house in Danske Bank’s own subsidiary in

India in order to have a more consistent flow of services and make sure that Indian em-

ployees have the right skill set for the challenges faced by the bank. A similar in-sourcing

trend can also be observed in Danske Bank Group IT in Lithuania where the help desk and

IT services related to internet banking have been in-sourced from IBM.

Figure 18 Changes in the production of financial services in sev-

eral stages


Today, many customers prefer digital solutions like internet banking which are often pre-

sumed to be less time consuming and more efficient. It is this trend in preferences that are

driving the ability of financial institutions to offshore jobs as physical contact is no longer

needed. However, some jobs still require face-to-face customer interactions, not least

among Danish IT suppliers. Our interviews reveal that one of the main barriers for out-

sourcing is customer contact, i.e., the more customer contact, the less likely it is that the

job will be offshored.


✓ The structures of the financial services are changing, becoming more digital, less dependent on face-to-face contact and local branches, and no longer purely produced by the established domestic financial sector.

✓ This has changed the production of financial services in several stages, where

a large part of the services today is produced in large centres, often across bor-

ders.

3.2 The structural drivers of offshoring If a company relocates job functions it is essentially due to the belief that it can serve its

present or prospective customers at a lower cost and/or better attract employees with the

right competences abroad. A key factor for many sectors, including the financial sector, is

that gross wage costs are often lower in regions chosen for offshoring.

Administrative tasks arecentralised at headquarters

Outsourcing of non-core activitiesto subsiduaries

Core services arestreamlined, digitalised and centralised, and branches areclosed

Core financialservices that do not require directcustomer contactare outsourced or offshored

33

Our interviews with market participants have revealed that costs and the lack of skilled

labour are the primary drivers of offshoring. The most recent trend seems to be towards

skills, whereas cost plays a decreasingly smaller role. However, the decision to minimise

costs may also partly be driven by increased competition, information and flexibility among

costumers, whereby Danish financial institutions have to decrease prices and operating

costs in order to not lose market shares.

None of the market participants have emphasised access to new markets as an important

driver of offshoring. On the contrary, financial institutions were sometimes present in local

markets before offshoring activities took place. Generally, there are specific barriers to off-

shoring that market participants need time to overcome, e.g., cultural challenges and so-

called entry barriers. This suggests that offshoring often takes place in countries where

firms have had time to build relationships and know-how to recruit effectively and integrate

new employees. This also implies that firms normally offshore slowly and sometimes even

rely on retirement/resignations and, therefore, do not have to fire any Danish employees.

Some IT firms and financial institutions also require a very flexible workforce that can scale

according to the present work load. Many IT tasks are therefore offshored to IT consultants

that offer flexibility, but often work with a specific company for an extended period of time.

This arrangement is sometimes made possible by favourable framework conditions in some

countries: e.g., Poland has a tax system that generally favours external consultants.

In this study, we have focused on two specific drivers of outsourcing in the broader financial

sector which go beyond digitalisation and lower wage costs:

1. Lack of qualified labour

2. The Danish wage tax on staff in the financial sector

A lack of specialists within IT and financing

An important factor, as argued above, is the lack of qualified labour in IT. Today, Danish

companies feel that they are missing the right IT specialists, and finance and insurance

specialists. This trend for both sectors has been increasing since 2014, and the lack of IT

consultants has increased 50 per cent since 2011: see Figure 19a.

34

Figure 19 Increasing lack of labour a) The lack of labour has been increasing b) … and will continue to increase

Note: Panel a): Data for 2011 is an average of May to December. Data for 2017 is temporary (January to

April)

Source: Panel a): Statistics Denmark and Copenhagen Economics. Panel b): Højbjerre Brauer Schultz (2016)

A recent study found that 3 out of 10 companies which have tried to hire IT specialists, have

not been able to do so.2 The recruitment challenges are widely known across different edu-

cational backgrounds and the problems are, to a large extent, created by problems of find-

ing an employee with the right competences.

… and the gap is growing

The lack of IT specialists will continue in the coming years. Despite the fact that more and

more educational programs have an increased focus on IT, the gradual rise in supply will

not be able to match increasing demand in the future. Estimates show that Denmark will

experience a deficit of 19,000 IT specialists by 2030, cf. Figure 19, panel b. The lack of

labour will be driven by a lack of specialists with a tertiary education.

This lack of specialists may lead to production limitations and lower productivity, because

the jobs may be occupied by people with lower competences or be offshored for the wrong

reasons. Financial services are extremely IT intensive and the lack of IT specialists will

therefore affect the financial sector to a large degree. Beside the IT sector itself, the financial

and insurance sector is the sector with the highest concentration of IT specialists.

The wage tax comes at a direct cost

The wage tax is part of the taxation that distorts the labour market by making Danish fi-

nancial sector employees significantly more expensive than employees in other countries

and sectors. The wage tax rate was 12.2 per cent in 2015 and will steadily increase year by

year to over 15 per cent in 2020, see Figure 20.

2 Højbjerre Brauer Schultz (2016)

0,0

0,5

1,0

1,5

2,0

2,5

3,0

0

5

10

15

20

25

30

per cent

of firms

per cent

of firms

IT-consultants etc.

Financing and insurance (right axis)

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

2013 2016 2019 2022 2025 2028

Number

Change in supply Change in demand

19,000

35

Figure 20 Wage tax as an extra tax on jobs in the Danish financial

sector

Source: Copenhagen Economics based on PwC tax

When the cost of employees in Denmark is higher, financial companies will naturally try to

substitute either with more IT or employees in other countries. Hence, the wage tax natu-

rally drives some share and speed of the offshoring and digitalisation trend in Denmark.

Furthermore, the wage tax generally makes financial services more expensive in Denmark,

whereby the demand of financial services in the economy and size of the sector will be lower

than the optimal level (without this distortion).

Using standard methods used in the literature, we find that the number of employees would

be between 800 and 1,500 higher in 2020 if the wage tax had remained constant from 2015

and onward: see Figure 21.3 A smaller share of this (400-600 jobs) is because of the demand

elasticity, while another 400 to 900 jobs are related to offshoring. We have used the mean

of 1.100 lost jobs for other calculations in this report.

3 To analyse how much the wage tax effects the number of employees in the Danish financial sector, we have estimated the

effect of freezing the wage tax at its 2015-level, see Figure 22. Here we assume the same elasticities on demand for financial

services as has been found/used in previous literature, and some higher offshoring labour substitution effects. See Copen-

hagen Economics (2016) for a more detailed description of the method.

0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Actual wage tax Alternative

Per cent

36

Figure 21 The estimated effect on employment in the Danish

banking sector if the wage tax was kept at 12 per cent from 2015-

2020

Note: We assume a total demand elasticity of banking services of between -0.45 and -0.65. Further, on half

of the jobs in the banking sector, we assume an elasticity of substitution between domestic and foreign

labour of between -0.5 and -1.5

Source: Statistic Denmark, own calculations and the methods used in Copenhagen Economics (2016)


✓ Some of the main drivers of offshoring have been the lack of competent domes-tic labour within IT and finance as well as an increasing focus on cost minimi-sation.

✓ Some barriers to offshoring have been production uncertainty and lack of knowledge about the job markets in low cost countries.

✓ Especially the lack of IT consultants is a problem; many companies report is-sues when trying to hire IT specialist and by 2030 Denmark is estimated to lack about 19,000 IT specialists.

✓ Taxation is a large driver of the high labour costs in Denmark. The wage tax is

part of this and have had some influence on the large tendency for outsourcing

in the Danish financial sector.

3.3 The level of competition in the financial sector is expected

to keep rising Jobs in the financial sector in Denmark are increasingly exposed to international competi-

tion. This is due to the fact that more and more jobs in financial companies are being lo-

cated, where the wage costs are lower and it is easier to attract the right people and skills.

In addition, there has been rising international competition on the market for financial

services. By this, domestic banks risk becoming outmatched by foreign banks. Until now

34.000

36.000

38.000

40.000

42.000

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Actual numbers

Actual and simple forecast of total employees

Total accounting for a std. substitution effect (high/low estimate)

Total accounting for an outsourcing effect i large banks (high/low estimate)

Number of employees in Danish banking sector

Estimate and

scenario analysis

+400-900

+400-600

37

this competition has mainly been observed on the business side where large Danish com-

panies more and more often buy financial services abroad.

How much are we talking about?

We are looking at an interaction between exposure to competition in Danish financial com-

panies and the international competition between financial companies on a global scale.

Below, we have made an estimate of exposure to competition based on data from Statistics

Denmark.

We estimate that approximately 10 per cent of the employment in the financial sector was

exposed to competition 20 years ago, 25 per cent 10 years ago, and up to 50 per cent today,

as illustrated in Figure 22. Compared to, e.g., manufacturing, the prospects of rising inter-

nationalisation will continue in the financial sector, because the physical placement of the

production of financial services will be detached from the demand. The sector will therefore

not have the same limitation as, e.g., transport time for industrial goods.

Figure 22 A large increase in the share of jobs in the financial sec-

tor being exposed to competition Note: The calculations are based on register data for work functions in the financial sector, where any type of

function is assumed to have a certain degree of exposure to international competition: see appendix B

for additional details

Source: Register data from Statistics Denmark and Copenhagen Economics

A challenge and a possibility

International competition is both a challenge and a huge opportunity for the Danish finan-

cial sector. If the sector is able to find some areas where it is/can become a part of the

international elite, we will experience a large export potential. On the other hand, the Dan-

ish financial sector risks – mainly due to the country’s size and weak framework conditions

– that many services can be produced more efficiently in other countries.

10% 25% 50%

Whole sector

Exposed to competition

1997 2005 2015

38


✓ The number of jobs in the financial sector exposed to international competition

has increased a lot in recent years and is expected to keep rising. In 2015, as

much as 50 per cent of the jobs in the sector may be exposed to competition.

✓ This will result in more offshoring in the coming years, challenges and possi-

bilities for the Danish financial sector.

3.4 Offshoring benefits some employees, but hurts others When jobs are moved out of Denmark, it typically has negative consequences for Danish

staff in low-knowledge areas. It is primarily those workers that are exposed to competition

who get fired and replaced by labour abroad, and for many of these employees it is difficult

to find a new job at the same wage level. For the low-knowledge employees, the future will

often involve stagnating wage development and insecurity about future rounds of layoffs.

Specifically, we find that unemployment results in a 10 per cent wage decrease the following

year for people that find new employment: see Figure 23, panel a. The consequences for

employees are long lasting; 5 years after the unemployment spell, wages are approximately

3 per cent lower than what would have been the case if employment had continued. One of

the drivers is that only roughly 40 per cent find new jobs in the highly productive financial

sector, and hence people do not necessarily get a job that aligns completely with their skill

set. In addition to the above, 38 per cent on average do not find new employment in the

following years and are therefore either retired, have exited the labour market or are un-

employed.

39

Figure 23 Wage consequences a) Consequences on wages of

unemployment in the financial sector b) Increasing gap in wages between

management and employees without managerial responsibility in the financial sector

Note: Panel a): Based on employees working in the financial sector in 2008 and 2009, who were (at least to

some extent) unemployed in 2010, and subsequently found employment from 2011 and onwards. The

dashed line show hypothetical wages for people within the financial sector based on wage growth of

employees without managerial responsibility

Source: Panel a): Copenhagen Economics based on register data from Statistics Denmark. Panel b): Statistics

Denmark

For the highly educated in knowledge-intensive areas in Danish finance and IT companies,

the scenario is inverse. These workers will become a part of the efficiency improvements

taking place in the companies and hence experience an improvement of their wages in the

years of the offshoring. This is especially true at the management level.4 An indication of

this is apparent from an increasing gap between average management wage levels and em-

ployees without managerial responsibility: see Figure 23, panel b. Thus, from 2002 to 2015

management wages increased by 25 per cent compared to 19 per cent for employees without

managerial responsibility.

4 As demonstrated in Hummels et al. (2013)

0

100

200

300

400

500

600

700

800

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Management

Employees without managerial responsibility

Hourly wage (DKK)Average

hourly wage

(DKK)

200

210

220

230

240

250

260

2008 2009 2010 2011 2012 2013 2014 2015

Event window

10% gap

3% gap

40


✓ Offshoring to low-cost countries has negative consequences for Danish work-

ers in low-knowledge jobs, while it is beneficial for Danish workers in highly

educated and knowledge-intensive jobs.

✓ Layoffs from the financial sector often result in long-term unemployment, and

for people that do find a new job it results in a 10 per cent wage decrease the

first year (on average).

3.5 Jobs at risk in coming years from increase in skill gap and

higher rate for wage taxes From a real economic perspective, offshoring has a cost when it is done for the wrong rea-

sons. Here we will focus on the two main policy factors that may increase the tendencies

for offshoring in the financial industry in the coming years

• The skill gap of IT specialists

• The increase in the Danish wage tax on the financial sector

For the financial sector the combined effect of the increase in the wage tax from 2014 and

an increasing skills gap of IT skills will reduce employment in the sector. We have a poten-

tial skills gap for workers with strong IT skills that may reach 6,000 by 2020, as reported

earlier5. As the financial sector is highly depending on such skills along with other indus-

tries deeply involved in the digitalisation, the skill gap will have a negative impact on the

employment in the industry.

The precise effect for the financial sector is difficult to predict, inter alia, because a number

of Danish industries will compete to recruit the available specialists. That will drive up

wages, making offshoring of IT jobs more attractive and reduce IT-based innovation in

Danish financial institutions. Figure 24 below provides an illustration of possible effects:

perhaps 1,500 jobs lost due to the IT skill gap6 and around 1,100 jobs lost due to higher

wage tax.

5 See Figure 19, panel b. 6 Back in 2013, one-sixth of all Danish IT specialist were employed in the financial sector (source: Børsen based on figures

from Finansforbundet). The number of IT specialist in the financial sector has increased a lot since then, and the financial

sector also uses large-scale IT companies as subcontractors. Thus, the total number of IT employees directly or indirectly

affiliated with the financial sector is significantly greater than one-sixth. As a rough estimate, we here assume that 25 per

cent of all IT specialists are affiliated with the financial sector.

41

Figure 24 Potential job losses from higher wage tax and skill gap

Note: These are rough estimates and illustrations.

Source: Statistics Denmark, Højbjerre Brauer Schultz (2016)

In the end, as disused in the first chapter, unhealthy offshoring may result in negative spill-

over effect on the rest of the financial sector and economy in general. When large financial

institutions choose to place their offices in Copenhagen, it adds to Copenhagen’s position

as a centre of competence within the given financial field. This will attract other financial

institutions in the same field, while a good reputation will make it easier for companies to

attract high skilled labour etc. For example, Copenhagen has a position and reputation as

a centre of competence within asset management and has a potential to get an area of com-

petence within Fintech. When financial companies get incentives to move their offices and

jobs abroad – either because of high labour costs or lack of specialists – Denmark may

eventually lose these areas of competence. This could imply huge potential job losses, both

directly and indirectly (in compliance industries and subcontractors).


✓ By 2020, perhaps 1,500 jobs will be lost due to the IT skill gap and around 1.100

jobs lost due to higher wage tax.

✓ This will come at a cost to the Danish economy, as laid off workers cannot uti-

lize specialized competence when finding new employment in other sectors.

✓ Eventually, unhealthy offshoring may put Denmark’s current and future areas

of competence at risk.

34.000

36.000

38.000

40.000

42.000

44.000

2012 2013 2014 2015 2016 2017 2018 2019 2020

Actual numbers

Simple flat forecast - no changes in policies

Dropping wage tax increase and no further increase in IT skill gap

Dropping the increase in wage tax

Number of employees in Danish banking

42

References

Copenhagen Economics (2016): Wage tax on a rapidly changing

Swedish financial sector.

Copenhagen Economics (2016): Why and how to apply a Value

Added Tax on financial services

The Danish Agency for Labour Market and Recruitment (2016): Re-

kruttering på det danske arbejdsmarked

Hummels et al. (2013) The Wage Effects of Offshoring: Evidence from

Danish Matched Worker‐Firm Data

Højbjerre Brauer Schultz (2016): Virksomheders Behov for Digitale

Kompetencer

Kleven, H. J., Landais, C., Saez E. & Schultz, E. (2014): Migration and

Wage Effects of Taxing Top Earners: Evidence from the Foreign-

ers’ Tax Scheme in Denmark. The Quarterly Journal of Economics

(2014), 333-378

Oxford Research (2012): Global arbejdsdeling i den finansielle sector

A Appendix A

A Offshoring estimation techniques and data sources

Our data sources:

Our offshoring estimation of jobs in both the financial and IT sector is generally based on

four data sources:

1. Detailed services import statistics: We use detailed Danish Statistics import regis-

ter data for all large and many smaller financial and IT companies. The data runs

from 2005 to 2015 and is divided into import of financial services (non-FISIM),

data services and research services. When financial and IT companies start offshor-

ing and producing services in other countries, they have to (by law) import these

services to Denmark when selling to Danish customers. Hence, this data gives clear

indirect indications of how much of the service productions are offshored, and

which we are able to convert into an estimate for the number of jobs offshored

(more about conversion below). Before 2009, these figures are quite uncertain.

Here we have also used data from national input output tables and other data on

foreign trade with services.

2. Yearly account figures: In recent years, especially the larger banks have started re-

porting their in-house number of employees working in different countries. These

numbers are found in their yearly accounts.

3. Interviews: We also have some numbers from our interview with the larger banks,

Nordea, Danske Banks, as well as some of the large financial IT companies; NETS

and SDC.

4. Other sources: From earlier literature, newspapers etc., we also have specific num-

bers on how many jobs have been offshored at different points in time. For 2012,

we use point estimates from Oxford Research (2012).

The estimations

With the services import statistics as our main data source, we use the other three data

sources to calibrate how the amount of services imported relates to the number of jobs off-

shored. In 2012 and onwards, we have relatively more accurate estimates from the latter

three sources.

For indirect offshoring, we first estimate the total offshoring in the IT sector, and then use

input-output statistics in order to estimate the share of IT services in Denmark going into

the financial sector.

44

B Appendix B

B Estimation of jobs in the financial sector exposed to international competition

Our estimation of jobs in the financial sector exposed to international competition is based

on register data on all jobs in the financial sector from 1997 to 2015. For each employee, we

know what specific sub-branch of the financial sector they work in, and (more importantly)

what job function they have. This estimation primarily uses the job function, given by the

DISCO codes from Statistics Denmark. From here, we are able to determine how many

people in the financial sector are working in, for example:

• Administration

• General office work

• Financial transactions

• HR

• IT, programming

• IT, back office

• Sales

• Trading

• Local bank advisory

For each function in each year, we provide a rough estimate of the extent of international

competition. Based on these numbers we are able to give a rough estimate of the share of

the total sector employees that are exposed to international competition.

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