Offshoring, Low-skilled Immigration and Labor Market Polarization

During the last three decades, the U.S. labor market was characterized by its employment polarization. As jobs in the middle of the skill distribution disappeared, employment expanded for the high and low-skill occupations. Real wages did not follow the same pattern. While earnings for the high-wage occupations increased robustly, wages for both low and middle-skill workers remained subdued. We relate this evidence to the increase in offshoring and low-skilled migration, and develop a multi-country stochastic growth model to rationalize the patterns of employment and wages. Offshoring negatively affects the middle-skill occupations, but increases aggregate productivity. This benefits the high-skill occupations, and in turn leads to increased demand for the non-tradable personal services, which employ mostly low-skill workers. However, low-skill wages remain depressed due to the rising migration inflows. Native workers react by upgrading the skill content of their labor tasks as they invest in training. The model is estimated with multilateral trade-weighted macroeconomic indicators and U.S.-Mexico border enforcement data.