Offshoring and Wage Inequality: Theory and Evidence from Japan

Hiroyuki Nishiyama, Mina Nakano (), Mizuki Tsuboi () and Manabu Furuta ()
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Mina Nakano: University of Hyogo
Mizuki Tsuboi: University of Hyogo
Manabu Furuta: Kobe University

No 2511, Discussion Papers from Graduate School of Economics, Kobe University

Abstract: Does offshoring widen or narrow wage inequality? To answer this question, we develop a tractable North-South model that features firm heterogeneity, foreign outsourcing, and vertical specialization. In a baseline model with exogenous firm’s outsourcing decisions, we show that an increase in outsourcing raises skilled wages, lowers unskilled wages, widens wage inequality, and improves welfare. In an extended model with endogenous firm’s outsourcing decisions, however, an increase in outsourcing raises or lowers skilled and unskilled wages, widens or narrows wage inequality, and improves or deteriorates welfare, depending on the initial level of outsourcing. Using Japanese data, we then show that, in contrast to most findings for the U.S., once we account for initial industry-level differences in the extent of outsourcing, it instead narrows wage inequality.

Pages: 22 pages
Date: 2025-04
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