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Offshoring, Matching, and Wage Inequality: Theory and Evidence

Author

Listed:
  • Kim, Gueyon

    (University of California, Santa Cruz)

  • Lee, Dohyeon

    (Amazon)

  • Pozzoli, Dario

    (Copenhagen Business School)

Abstract

This paper examines how offshoring affects worker skill demands and studies its implications for wage inequality. Using Danish administrative data, we find that offshoring increases firm-level demand for higher skills in occupations with high exposure to foreign competition. This effect is more pronounced in low-productivity firms, highlighting distributional impacts across firms. By constructing a Becker-type worker-firm matching model in a global economy, we demonstrate underlying mechanisms and quantify the role of offshoring-induced adjustments. Offshoring increases firm similarity in worker skill and wages within high-exposed jobs, leading to a decrease in between-firm inequality—a contrast to the effects of technological change.

Suggested Citation

  • Kim, Gueyon & Lee, Dohyeon & Pozzoli, Dario, 2025. "Offshoring, Matching, and Wage Inequality: Theory and Evidence," IZA Discussion Papers 17663, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp17663
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • 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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