Offshoring – Effects on technology and implications for the labor market

I propose a “technology channel” through which imports of low-skilled intermediates (offshoring) benefit both high- and low-skilled workers by inducing capital deepening and innovation in developed countries. Data strongly support the presence of this channel. Offshoring is associated with large increases in technology variables – equipment-labor ratio and R&D intensity – and labor outcomes – employment and wage bills of high- and low-skilled workers. I formalize this channel in a structural model. Results show that it is the dominant mechanism through which offshoring affects labor outcomes, offsetting negative substitution effects on low-skilled wages, and generating a large welfare gain.