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Offshoring and Directed Technical Change

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  • Gino Gancia

    (CREI and UPF)

  • Fabrizio Zilibotti

    (University of Zurich)

  • Daron Acemoglu

    (Massachusetts Institute of Technology)

Abstract

We study the effects of offshoring on wages, welfare and inequality through its impact on technology. To this end, we introduce directed technical change into a model of task-based production and offshoring. A unique final good is produced by combining a skilled and an unskilled intermediate good, each produced from a continuum of tasks. Offshoring takes the form of some of these tasks being transferred from a skill-abundant West to a skill-scarce East. Profit maximization determines both the equilibrium level of offshoring and the rate at which the productivities of skilled and unskilled workers improve. On the one hand, by increasing the price of skill-intensive products, offshoring induces skill-biased technological change. On the other, it also expands the market size for technologies complementing unskilled labor. In the empirically more relevant case, starting from low levels, an increase in offshoring opportunities triggers a transition with falling real wages for unskilled workers in the West, skill-biased technical change and rising skill premia worldwide. When the extent of offshoring becomes sufficiently large, instead, further increases in offshoring induce unskilled-labor biased technical change and reduce the long-run skill premium. Interestingly, wage inequality is highest for relatively low volumes of intermediate good trade. The transitional dynamics also suggest that offshoring and technological change are substitutes in the short run, but complements in the long run. Finally, we provide conditions under which offshoring improves not only the welfare of workers in the East, but also those of both skilled and unskilled workers in the West.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 688.

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Date of creation: 2012
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Handle: RePEc:red:sed012:688

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Cited by:
  1. Ashima Goyal, 2013. "Growth drivers: ICT and inclusive innovations," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2013-018, Indira Gandhi Institute of Development Research, Mumbai, India.
  2. Angus Chu & Guido Cozzi & Yuichi Furukawa, . "Effects of Economic Development in China on Skill-Biased Technical Change in the US," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  3. Gino Gancia, 2012. "Globalization, technology and inequality," Economics Working Papers 1363, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2012.
  4. Parteka, Aleksandra & Wolszczak-Derlacz, Joanna, 2013. "Integrated Sectors - Diversified Earnings: The (Missing) Impact of Offshoring on Wages and Wage Convergence in the EU27," Institute for Research on Labor and Employment, Working Paper Series qt3tm2935j, Institute of Industrial Relations, UC Berkeley.

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