A New Look at Offshoring and Inequality: Specialization Versus Competition

Karen Helene Ulltveit-Moe and Karolina Ekholm ()

No 6402, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The received wisdom is that a rising skill premium accompanied by a simultaneous rise in skill intensity characterizes relative wages and the employment structure in US manufacturing. However, we present evidence to show that the recent developments in the U.S. do not conform to this pattern and that the evolution of relative wages over the last three decades has in fact been bell-shaped. We argue that this bell-shaped evolution of wage inequality can be linked to globalization and a rise in offshoring. To analyze the relationship between globalization, offshoring and relative wages, we develop a general equilibrium model of trade and offshoring. This reveals that globalization and offshoring have two opposing effects on relative wages: greater vertical specialization increases wage inequality, while greater international competition increases wage inequality. The result is a bell-shaped relationship between wage inequality and offshoring when globalization is driven by falling trade costs for goods. However, we also find that if the globalization process continues as a result of reduced costs of fragmentation, this fosters increased wage inequalities. Consistent with recent observations, our analysis suggests that the fears related to offshoring and inequality may prove unjustified in the short term although the long-term effects may be quite different.

Keywords: Globalization; Offshoring; Trade; Wage inequality (search for similar items in EconPapers)
JEL-codes: F12 F15 J31 O33 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-bec and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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