A New Look at Offshoring and Inequality: Specialization Versus Competition

29 Pages Posted: 29 May 2008

See all articles by Karolina Ekholm

Karolina Ekholm

Stockholm School of Economics - Department of Economics; Centre for Economic Policy Research (CEPR); Center for Business and Policy Studies (SNS); CESifo (Center for Economic Studies and Ifo Institute)

Karen Helene Ulltveit-Moe

University of Oslo - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: July 2007

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

JEL Classification: F12, F15, J31, O33

Suggested Citation

Ekholm, Karolina and Ulltveit-Moe, Karen Helene, A New Look at Offshoring and Inequality: Specialization Versus Competition (July 2007). CEPR Discussion Paper No. DP6402. Available at SSRN: https://ssrn.com/abstract=1138515

Karolina Ekholm (Contact Author)

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
Sveavagen 65
S-113 83 Stockholm
Sweden
+46 8 736 9220 (Phone)
+46 8 313 207 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Center for Business and Policy Studies (SNS)

Skoldungagatan 2, Box 5629
S-114 86 Stockholm
Sweden

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Karen Helene Ulltveit-Moe

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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