International outsourcing of skill intensive tasks and wage inequality

Abstract

Within the context of a product variety model, this paper examines the impact of international outsourcing of some skill intensive tasks on wage inequality. We consider four possibilities: long-run equilibrium where varieties of producer services are non-traded, long-run equilibrium where varieties of producer services are traded, short-run equilibrium where varieties of producer services are non-traded and short-run equilibrium where varieties of producer services are traded. It is shown that in each case, under certain conditions, international outsourcing can increase skilled–unskilled wage inequality. In the first three cases, outsourcing affects wage inequality directly as well as indirectly. In the short-run equilibrium, where varieties of producer services are traded, international outsourcing increases skilled–unskilled wage inequality only through an indirect channel. In the short-run equilibrium, where all goods are traded, the impact of outsourcing on wage inequality depends solely on the relative size of the income share of capital. Furthermore, in the long-run equilibrium, outsourcing increases the productivity of the industrial sector.