Offshoring and Directed Technical Change

48 Pages Posted: 1 Feb 2013

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Gino A. Gancia

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI)

Fabrizio Zilibotti

Yale University; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2012

Abstract

To study the short-run and long-run implications on wage inequality, we introduce directed technical change into a Ricardian model of offshoring. A unique final good is produced by combining a skilled and an unskilled product, each produced from a continuum of intermediates (tasks). Some of these tasks can be transferred from a skill-abundant West to a skill-scarce East. Profit maximization determines both the extent of offshoring and technological progress. Offshoring induces skill-biased technical change because it increases the relative price of skill-intensive products and induces technical change favoring unskilled workers because it expands the market size for technologies complementing unskilled labor. In the empirically more relevant case, starting from low levels, an increase in offshoring opportunities triggers a transition with falling real wages for unskilled workers in the West, skill-biased technical change and rising skill premia worldwide. However, when the extent of offshoring becomes sufficiently large, further increases in offshoring induce technical change now biased in favor of unskilled labor because offshoring closes the gap between unskilled wages in the West and the East, thus limiting the power of the price effect fueling skill-biased technical change. The unequalizing impact of offshoring is thus greatest at the beginning. Transitional dynamics reveal that offshoring and technical change are substitutes in the short run but complements in the long run. Finally, though offshoring improves the welfare of workers in the East, it may benefit or harm unskilled workers in the West depending on elasticities and the equilibrium growth rate.

Keywords: Directed Technical Change, Growth and Productivity, Offshoring, Skill Premium

JEL Classification: F43, O31, O33

Suggested Citation

Acemoglu, Daron and Gancia, Gino A. and Zilibotti, Fabrizio, Offshoring and Directed Technical Change (December 2012). CEPR Discussion Paper No. DP9247, Available at SSRN: https://ssrn.com/abstract=2210217

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Gino A. Gancia

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

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Fabrizio Zilibotti

Yale University ( email )

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