On modeling task, skill and technology upgrading effects of globalization with heterogeneous labor

We adapt Yeaple's (2005) heterogeneous agent framework to model firms in the North as making explicit offshore outsourcing decisions to cheap-labor economies. We highlight how firms' technology transformations due to globalization will induce skill upgrading in the North, increase aggregate productivity, average wages and therefore total welfare at the cost of increased wage inequalities. We analytically derive conditions under which all consumers – including lower-skilled workers – might nevertheless gain from the surge of offshore outsourcing. We also show that extending the model to the more realistic case of multi-product firms tends to boost the potential welfare gains.