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A New Look at Offshoring and Inequality: Specialization Versus Competition

  • Ekholm, Karolina
  • Ulltveit-Moe, Karen-Helene

The 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6402.

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Date of creation: Jul 2007
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Handle: RePEc:cpr:ceprdp:6402
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  1. Deardorff, A.V., 1998. "Fragmentation Across Cones," Working Papers 427, Research Seminar in International Economics, University of Michigan.
  2. Antras, Pol & Helpman, Elhanan, 2004. "Global Sourcing," Scholarly Articles 3196327, Harvard University Department of Economics.
  3. Deardorff, A.V., 1998. "Fragmentation in Simple Trade Models," Working Papers 422, Research Seminar in International Economics, University of Michigan.
  4. Gene M. Grossman & Esteban Rossi-Hansberg, 2006. "The rise of offshoring: it's not wine for cloth anymore," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 59-102.
  5. Paul Krugman, 1995. "Growing World Trade: Causes and Consequences," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 327-377.
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  7. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  8. Phillip Swagel & N. Gregory Mankiw, 2005. "The Politics and Economics of Offshore Outsourcing," Working Papers 49881, American Enterprise Institute.
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  12. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Papers 95-14, California Davis - Institute of Governmental Affairs.
  13. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 367-97, May.
  14. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
  15. Erica L. Groshen & Bart Hobijn & Margaret M. McConnell, 2005. "U.S. jobs gained and lost through trade: a net measure," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Aug).
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  17. Desjonqueres, Thibaut & Machin, Stephen & Van Reenen, John, 1999. " Another Nail in the Coffin? Or Can the Trade Based Explanation of Changing Skill Structures Be Resurrected?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(4), pages 533-54, December.
  18. Rutherford, Thomas F., 1995. "Extension of GAMS for complementarity problems arising in applied economic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1299-1324, November.
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  21. Jose Campa & Linda S. Goldberg, 1997. "The Evolving External Orientation of Manufacturing Industries: Evidence from Four Countries," NBER Working Papers 5919, National Bureau of Economic Research, Inc.
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