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Foreign Investment, Outsourcing and Relative Wages

Author

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  • Feenstra, R.C.
  • Hanson, G.H.

Abstract

In this paper we examine the reduction in the relative employment and wages of unskilled workers in the U.S. during the 1980's. We argue that a contributing factor to this decline was rising imports reflecting the outsourcing of production activities. In a theoretical model, we show that any increase in the Southern capital stock relative to that of the North, or neutral technological progress in the South, will increase the relative wage of skilled workers in both countries due to a shift in production activities to the South. Corresponding to this change in the relative wage is an increase in the price index of Northern activities within each industry, relative to that of the South. We confirm that this change in relative prices occurred for the U.S. and other industrialized countries relative to their trading partners. We also estimate that 15-33% of the increase in the relative wage of nonproduction (or skilled) workers in the U.S. during the 1980's is explained by rising imports.
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Suggested Citation

  • Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Papers 95-14, California Davis - Institute of Governmental Affairs.
    • Handle: RePEc:fth:caldav:95-14
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    References listed on IDEAS

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    1. Eli Berman & John Bound & Zvi Griliches, 1994. "Changes in the Demand for Skilled Labor within U. S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 367-397.
    2. Rudiger Dornbusch & Stanley Fischer & Paul A. Samuelson, 1980. "Heckscher-Ohlin Trade Theory with a Continuum of Goods," The Quarterly Journal of Economics, Oxford University Press, vol. 95(2), pages 203-224.
    3. Steven J. Davis, 1992. "Cross-Country Patterns of Change in Relative Wages," NBER Chapters,in: NBER Macroeconomics Annual 1992, Volume 7, pages 239-300 National Bureau of Economic Research, Inc.
    4. Bernard, Andrew B. & Jensen, J. Bradford, 1997. "Exporters, skill upgrading, and the wage gap," Journal of International Economics, Elsevier, vol. 42(1-2), pages 3-31, February.
    5. Jagdish Bhagwati, 1995. "Trade and wages: choosing among alternative explanations," Economic Policy Review, Federal Reserve Bank of New York, issue Jan, pages 42-47.
    6. Eli Bekman & John Bound & Stephen Machin, 1998. "Implications of Skill-Biased Technological Change: International Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 113(4), pages 1245-1279.
    7. Edward E. Leamer, 1994. "Trade, Wages and Revolving Door Ideas," NBER Working Papers 4716, National Bureau of Economic Research, Inc.
    8. George J. Borjas & Richard B. Freeman & Lawrence F. Katz, 1992. "On the Labor Market Effects of Immigration and Trade," NBER Chapters,in: Immigration and the Workforce: Economic Consequences for the United States and Source Areas, pages 213-244 National Bureau of Economic Research, Inc.
    9. Paul Krugman & Robert Lawrence, 1993. "Trade, Jobs, and Wages," NBER Working Papers 4478, National Bureau of Economic Research, Inc.
    10. Feenstra, Robert C. & Hanson, Gordon H., 1997. "Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras," Journal of International Economics, Elsevier, vol. 42(3-4), pages 371-393, May.
    11. Robert Z Lawrence, 1994. "Trade, Multinationals and Labour," RBA Annual Conference Volume,in: Philip Lowe & Jacqueline Dwyer (ed.), International Intergration of the Australian Economy Reserve Bank of Australia.
    12. repec:aei:rpbook:52903 is not listed on IDEAS
    13. Jeffrey D. Sachs & Howard J. Shatz, 1994. "Trade and Jobs in Manufacturing," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 1-84.
    14. Eli Berman & John Bound & Zvi Griliches, 1993. "Changes in the Demand for Skilled Labor within U.S. Manufacturing Industries: Evidence from the Annual Survey of Manufacturing," NBER Working Papers 4255, National Bureau of Economic Research, Inc.
    15. John M. Abowd & Richard B. Freeman, 1991. "Immigration, Trade, and the Labor Market," NBER Books, National Bureau of Economic Research, Inc, number abow91-1, June.
    16. Edward E. Leamer, 1992. "Wage Effects of A U.S. - Mexican Free Trade Agreement," NBER Working Papers 3991, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    INTERNATIONAL FINANCE; CAPITAL; INVESTMENTS; WAGES; EMPLOYMENT;

    JEL classification:

    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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