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Offshoring and Segregation by Skill: Theory and Evidence

Author

Listed:
  • Gueyon Kim

    (University of California, Santa Cruz)

  • Dohyeon Lee

    (University of Wisconsin--Madison)

Abstract

This paper examines the labor market consequences of offshoring. We use the Danish employer-employee matched data together with the newly constructed skill measures to evaluate the effect of offshoring on wages and reallocation of workers within offshorable occupations. Offshoring reduces domestic worker wages; and increases the probability of reallocation away from the high-productivity firms to the low-productivity ones. The least-skilled workers further face a greater risk of switching out to a less competitive sector. On the firm-side, offshoring improves the average skill of in-house workers at a lower cost. By estimating a worker-firm matching model, we examine the mechanisms of how offshoring affects labor market inequality and further assess the quantitative importance of various competing hypotheses such as technological change and the expansion of higher education, in addition to offshoring. We find substantially different effects: technology mainly increases the inequality between firms in terms of worker skill quality and average wages, while offshoring mitigates this rising trend.

Suggested Citation

  • Gueyon Kim & Dohyeon Lee, 2020. "Offshoring and Segregation by Skill: Theory and Evidence," Working Papers 2020-073, Human Capital and Economic Opportunity Working Group.
  • Handle: RePEc:hka:wpaper:2020-073
    Note: MIP
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    More about this item

    Keywords

    offshoring; skill; matching; segregation by skill; between-firm inequality;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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