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Offshoring And Wage Inequality In Developing Countries

  • Sherif Khalifa

    ()

    (Department of Economics, California State University)

  • Evelina Mengova

    ()

    (Department of Economics, California State University)

Registered author(s):

    The Heckscher-Ohlin model predicts that trade openness causes the skill premium to increase in skill-abundant developed countries, and to decrease in skill-scarce developing countries. Empirical evidence, however, shows that the skill premium declined in some developing countries, while others experienced an increase in wage inequality. This paper develops a North-South model, where firms produce a low-skilled and a high-skilled intensive good. The production of a unit of either good involves a continuum of L-tasks and H-tasks. The L-tasks can be performed by low-skilled workers, and the H-tasks can be performed by high-skilled workers. The Northern firms can produce the task in their headquarters, or offshore the task to the South. The results of the model suggest there is a threshold skill abundance level in the South, above which countries experience an increase in the skill premium after an improvement in the offshoring technology, and below which countries experience a decrease in the skill premium. The same pattern occurs with an improvement in the offshoring technology of tasks in the high-skilled and the low-skilled intensive industries. If wages in local production catch up with wages in the offshoring sector, offshoring does not impact wage inequality at a certain level of skill abundance. A threshold estimation, on 29 developing countries over the period 1982-2000, shows that there is a statistically significant skill abundance threshold, below which the coefficient on the relationship between offshoring and wage inequality is negative, and above which there is no impact of offshoring on wage inequality. Similar results are reached if offshoring is replaced by variables that proxy for the offshoring technology.

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    Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

    Volume (Year): 35 (2010)
    Issue (Month): 3 (September)
    Pages: 1-42

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    Handle: RePEc:jed:journl:v:35:y:2010:i:3:p:1-42
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    1. Aitken, B. & Harrison, A. & Lipsey, R.E., 1995. "Wages and Foreign Ownership: A Comparative Study of Mexico, Venezuela, and the United States," Papers 95-21, Columbia - Graduate School of Business.
    2. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
    3. Xu, Bin, 2003. "Trade liberalization, wage inequality, and endogenously determined nontraded goods," Journal of International Economics, Elsevier, vol. 60(2), pages 417-431, August.
    4. Zhu, Susan Chun & Trefler, Daniel, 2005. "Trade and inequality in developing countries: a general equilibrium analysis," Journal of International Economics, Elsevier, vol. 65(1), pages 21-48, January.
    5. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
    6. Susan Chun Zhu, 2004. "Trade, product cycles, and inequality within and between countries," Canadian Journal of Economics, Canadian Economics Association, vol. 37(4), pages 1042-1060, November.
    7. Beaulieu, Eugene & Benarroch, Michael & Gaisford, James, 2004. "Trade barriers and wage inequality in a North-South model with technology-driven intra-industry trade," Journal of Development Economics, Elsevier, vol. 75(1), pages 113-136, October.
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