The race between offshoring and automation in explaining wage polarization

Mafalda Pinho, Oscar Afonso and Tiago Sequeira

Macroeconomic Dynamics, 2024, vol. 28, issue 6, 1278-1312

Abstract: Offshoring and automation are sources of wage polarization. We reassess these two determinants of wage polarization in a single directed technical change setup that encompasses routine and nonroutine production. We empirically establish the conditional positive relationship between automation and relocations on one side and wage polarization on the other. Theoretically, we show that wage polarization increases with automation and offshoring. In particular, wage polarization in favor of domestic (nonroutine) high(low)-skilled workers is positively affected by an increase in domestic (nonroutine) high(low)-skilled labor quantity and/or absolute productivity. Additionally, it is also positively influenced by a rise in foreign (routine) medium-skilled labor quantity and/or absolute productivity while negatively impacted by an increase in domestic (routine) medium-skilled labor quantity and/or absolute productivity. We show that the effect of offshoring on wage polarization diminishes with the degree of substitutability between routine and nonroutine sectors in the economy, with the share of machines in the production of intermediate goods, and with the scale effect. We quantitatively assess the impact through a thorough data-based calibration exercise, where the numerical results confirmed the theoretical findings.

Date: 2024
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