A New Look at Offshoring and Inequality: Specialization Versus Competition
AbstractThe received wisdom is that a rising skill premium accompanied by a simultaneous rise in skill intensity characterizes relative wages and the employment structure in US manufacturing. However, we present evidence to show that the recent developments in the U.S. do not conform to this pattern and that the evolution of relative wages over the last three decades has in fact been bell-shaped. We argue that this bell-shaped evolution of wage inequality can be linked to globalization and a rise in offshoring. To analyze the relationship between globalization, offshoring and relative wages, we develop a general equilibrium model of trade and offshoring. This reveals that globalization and offshoring have two opposing effects on relative wages: greater vertical specialization increases wage inequality, while greater international competition increases wage inequality. The result is a bell-shaped relationship between wage inequality and offshoring when globalization is driven by falling trade costs for goods. However, we also find that if the globalization process continues as a result of reduced costs of fragmentation, this fosters increased wage inequalities. Consistent with recent observations, our analysis suggests that the fears related to offshoring and inequality may prove unjustified in the short term although the long-term effects may be quite different.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6402.
Date of creation: Jul 2007
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Find related papers by JEL classification:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F15 - International Economics - - Trade - - - Economic Integration
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- O33 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-08-27 (All new papers)
- NEP-BEC-2007-08-27 (Business Economics)
- NEP-INT-2007-08-27 (International Trade)
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