Fragmentation, Productivity and Relative Wages in the UK: A General Equilibrium Approach
Feenstra and Hanson (1999) propose a two-stop method to analyse the role of outsourcing and skill-biased technological change (SBTC) in the rise in wage inequality. This paper applies their methodology to UK manufacturing using data for the 1990s and extends it in order to obtain additional insight in the relative importance of the sector bias and the factor bias of outsourcing and SBTC. The results indicate that outsourcing has significantly contributed to the rise in the domestic wage inequality accounting for approximately 12% of the increase in the UK in the 1990s. Factor-biased outsourcing was about 2.5 times as important as sector-biased outsourcing in explaining the increase in wage inequality.
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