Offshoring may reduce income inequality in short term

Karolina Ekholm, Karen Helene Ulltveit-Moe, Mon, 07/30/2007



The received wisdom about the relative wages of skilled workers in the US is that the wage gap is growing as the skill intensity within industries is increasing, and these changes in wage and employment structure are often attributed to skill-based technical changes rather than to globalization and trade. Since the early 1990s, however, the pattern has been different. Up to around 1998, the skill premium in the US manufacturing sector continued to rise while the skill intensity actually fell, while in recent years this development was reversed, with the skill premium declining and the skill intensity increasing. The authors of CEPR DP6042 argue that this pattern can be linked to globalization and the rise in offshoring.

Their analysis reveals that the impact of globalization and offshoring on relative wages runs along two different lines: specialization and competition. As globalization triggers offshoring and vertical specialization occurs with unskilled activites being moved abroad, the skill premium at home increases. However, increased international competition in skill-intensive sectors resulting from globalization may have the opposite effect – a reduction in the skill premium.

This leads to a bell-shaped relationship between offshoring and relative wages when falling trade costs for goods is the driving force behind offshoring, as has been the case in the US. When falling costs of fragmentation begins to drive the process of offshoring, however, the relationship is U-shaped. The authors conclude that in the short-term, fears about the impact of offshoring and inequality may prove unjustified, but the long-term effects may be quite different.

DP6402 A New Look at Offshoring and Inequality: Specialization Versus Competition

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Topics:  International trade

Tags:  wage inequality, trade, globalization, offshoring


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