Wage inequality in trade-in-tasks models

Recent trade-in-tasks models suggest that relative low-skill wages (in rich high-skill abundant countries) may increase when low-skill tasks are offshored. However, using numerical simulations of these models we find that wage inequality is increasing for almost all endowment combinations (i.e. relative country sizes). The only exception is when the country is relatively small and offshoring levels are moderate or high. These results are robust to different offshoring cost parameters, factor production shares, elasticities of substitution, industryspecific offshoring costs, and different offshoring stages. Thus, the example portrayed in Grossman and Rossi-Hansberg (2008), where offshoring decreases wage inequality in an international price taking country with non-specialization in production, is indeed a special case. We also find, as in Markusen (2010) and Baldwin and Robert-Nicoud (2010), that offshoring can improve or decrease welfare in rich countries conditional on terms-of-trade effects. For relatively poor low-skill abundant countries, we find that offshoring is always welfare improving. However, the wage inequality effects of offshoring in these countries are conditional on the relative share of low-skill workers and the particular offshoring stage. Finally, we find that the GRH model can also account for wage polarization. This is done by expanding the model to have three skill-types and assuming that only medium-skill tasks are offshored. Moreover, when H-task offshoring is also possible, we find that overall wage inequality is decreasing with respect to the case when only M-task offshoring occurred.