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Globalization, Outsourcing, and Wage Inequality

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  • Robert C. Feenstra
  • Gordon H. Hanson

Abstract

There is considerable debate over whether international trade has contributed to the declining economic fortunes of less skilled workers. One issue that has become lost in the current discussion is how firms respond to import competition and how these responses, in turn, are transmitted to the labor market. In previous work, we have argued that outsourcing, by which we mean the import of intermediate inputs by domestic firms, has contributed to an increase in the relative demand for skilled labor in the United States. If firms respond to import competition from low-wage countries by moving non- skill-intensive activities abroad, then trade will shift employment towards skilled workers within industries. In this paper, we extend our previous work by combining new import data from the revised NBER trade database with disaggregated data on input purchases from the Census of Manufactures. We construct industry-by-industry estimates of outsourcing for the period 1972-1990 and reexamine whether outsourcing has contributed to an increase in relative demand for skilled labor. Our main finding is that outsourcing can account for 31-51% of the increase in the relative demand for skilled labor that occurred in U.S. manufacturing industries during the 1980s, compared to our previous estimate of 15-33%.

Suggested Citation

  • Robert C. Feenstra & Gordon H. Hanson, 1996. "Globalization, Outsourcing, and Wage Inequality," NBER Working Papers 5424, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5424
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    References listed on IDEAS

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    1. Matthew J. Slaughter, 1995. "Multinational Corporations, Outsourcing, and American Wage Divergence," NBER Working Papers 5253, National Bureau of Economic Research, Inc.
    2. Robert C. Feenstra & Gordon H. Hanson, 1995. "Foreign Investment, Outsourcing and Relative Wages," NBER Working Papers 5121, National Bureau of Economic Research, Inc.
    3. Baldwin, Robert E & Hilton, R Spence, 1984. "A Technique for Indicating Comparative Costs and Predicting Changes in Trade Ratios," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 105-110, February.
    4. 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.
    5. Stephen Nickell & D Nicolitsas, 1994. "Wages," CEP Discussion Papers dp0219, Centre for Economic Performance, LSE.
    6. 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.
    7. J. David Richardson, 1995. "Income Inequality and Trade: How to Think, What to Conclude," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 33-55, Summer.
    8. Richard B. Freeman, 1995. "Are Your Wages Set in Beijing?," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 15-32, Summer.
    9. John M. Abowd & Richard B. Freeman, 1991. "Immigration, Trade, and the Labor Market," NBER Books, National Bureau of Economic Research, Inc, number abow91-1.
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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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