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A trade theorist's take on skilled-labor outsourcing

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  • Deardorff, Alan V.

Abstract

Recent concern has attended the phenomenon of skilled-labor outsourcing, in which firms in the U.S. and other advanced countries have drawn upon the services of skilled workers in developing countries for activities that they used to do at home. Motivated by this and the fact that such outsourcing would be hard to explain without technological differences, this paper explores theoretically a simple story of outsourcing in which factor proportions and technology interact across activities performed within industries or firms. The model has a single sector in which a final output is produced from two activities that differ in their intensity of use of skilled and unskilled labor. In one activity, the developed world (North) has a technical advantage. In the other it does not, but a new regime makes it possible to outsource it to the developing world (South). The paper shows that this outsourcing, if the countries continue to diversify, causes the wage of unskilled labor in North to fall below that in South. However, if factor endowments differ enough to lead to specialization, then it becomes possible for both factors in North to gain.
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  • Deardorff, Alan V., 2005. "A trade theorist's take on skilled-labor outsourcing," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 259-271.
    • Handle: RePEc:eee:reveco:v:14:y:2005:i:3:p:259-271
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    1. Xu, Bin, 2001. "Factor bias, sector bias, and the effects of technical progress on relative factor prices," Journal of International Economics, Elsevier, vol. 54(1), pages 5-25, June.
    2. Deardorff, A.V., 1998. "Fragmentation Across Cones," Working Papers 427, Research Seminar in International Economics, University of Michigan.
    3. Davis, Donald R., 1995. "Intra-industry trade: A Heckscher-Ohlin-Ricardo approach," Journal of International Economics, Elsevier, vol. 39(3-4), pages 201-226, November.
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    Cited by:

    1. Ravi Batra & Hamid Beladi, 2010. "A Simple Two‐Sector Model of Outsourcing," Review of Development Economics, Wiley Blackwell, vol. 14(1), pages 64-73, February.
    2. João Amador & Robert Stehrer, 2014. "Portuguese Exports in the Global Value Chains," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    3. Rosario Crinò, 2009. "Offshoring, Multinationals And Labour Market: A Review Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 23(2), pages 197-249, April.
    4. Daron Acemoglu & Gino Gancia & Fabrizio Zilibotti, 2015. "Offshoring and Directed Technical Change," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 84-122, July.
    5. Amador, João & Cabral, Sónia, 2009. "Vertical specialization across the world: A relative measure," The North American Journal of Economics and Finance, Elsevier, vol. 20(3), pages 267-280, December.
    6. Andrés Rodríguez-Clare, 2010. "Offshoring in a Ricardian World," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 227-258, April.
    7. Pi, Jiancai & Zhou, Yu, 2013. "Institutional quality and skilled–unskilled wage inequality," Economic Modelling, Elsevier, vol. 35(C), pages 356-363.
    8. Oladi, Reza & Beladi, Hamid, 2009. "Market interconnection and wages," Economics Letters, Elsevier, vol. 105(1), pages 117-119, October.
    9. Rosario Crinò, 2010. "Service Offshoring and White-Collar Employment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 595-632.
    10. Anna M. Falzoni & Lucia Tajoli, 2011. "Offshoring and the Skill Composition of Employment in the Italian Manufacturing Industries," Rivista di Politica Economica, SIPI Spa, issue 1, pages 121-153, January-M.
    11. João Amador & Sónia Cabral, 2014. "Global Value Chains: Surveying Drivers, Measures and Impacts," Working Papers w201403, Banco de Portugal, Economics and Research Department.
    12. Ravi Batra & Hamid Beladi, 2010. "Outsourcing and the Heckscher–Ohlin Model," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 277-288, May.
    13. Markusen, James, 2005. "Modeling the Offshoring of White-Collar Services: From Comparative Advantage to the New Theories of Trade and FDI," CEPR Discussion Papers 5408, C.E.P.R. Discussion Papers.
    14. repec:gdk:wpaper:71 is not listed on IDEAS
    15. Amador, João & Cabral, Sónia, 2008. "International fragmentation of production in the Portuguese economy: What do different measures tell us?," MPRA Paper 9783, University Library of Munich, Germany.
    16. Mukherjee, Arijit & Tsai, Yingyi, 2013. "Multi-sourcing as an entry deterrence strategy," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 108-112.
    17. Anwar, Sajid, 2013. "Outsourcing and the skilled–unskilled wage gap," Economics Letters, Elsevier, vol. 118(2), pages 347-350.
    18. Burnett, Perry & Cutler, Harvey, 2018. "The transitional impacts of material and service offshoring," Journal of Policy Modeling, Elsevier, vol. 40(1), pages 136-150.
    19. Pi, Jiancai & Zhou, Yu, 2012. "Public infrastructure provision and skilled–unskilled wage inequality in developing countries," Labour Economics, Elsevier, vol. 19(6), pages 881-887.
    20. Anwar, Sajid & Sun, Sizhong & Valadkhani, Abbas, 2013. "International outsourcing of skill intensive tasks and wage inequality," Economic Modelling, Elsevier, vol. 31(C), pages 590-597.
    21. Beladi, Hamid & Dutta, Meghna & Kar, Saibal, 2016. "FDI and Business Internationalization of the Unorganized Sector: Evidence from Indian Manufacturing," World Development, Elsevier, vol. 83(C), pages 340-349.
    22. Pranab Kumar Das & Saibal Kar, 2015. "A Study of Demographic and Financial Changes in India," Palgrave Macmillan Books, in: José María Fanelli (ed.), Asymmetric Demography and the Global Economy, chapter 0, pages 213-241, Palgrave Macmillan.
    23. Wilhelm Kohler, 2007. "The Bazaar Effect, Unbundling of Comparative Advantage, and Migration," CESifo Working Paper Series 1932, CESifo.
    24. Óscar Afonso & Tiago Neves Sequeira & Marcelo Santos & Pedro Cunha Neves, 2023. "Global Firms, (de)unionization and Wage Inequality," Open Economies Review, Springer, vol. 34(5), pages 979-1013, November.
    25. Rosario Crino, 2006. "Are U.S. White-Collar Really at Risk of Service Offshoring?," KITeS Working Papers 183, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Oct 2006.

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    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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