Foreign Investment, Outsourcing and Relative Wages

53 Pages Posted: 30 Aug 2000 Last revised: 1 Jul 2010

See all articles by Robert C. Feenstra

Robert C. Feenstra

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Gordon H. Hanson

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS); National Bureau of Economic Research (NBER)

Date Written: May 1995

Abstract

In this paper we examine the reduction in the relative employment and wages of unskilled workers in the U.S. during the 1980's. We argue that a contributing factor to this decline was rising imports reflecting the outsourcing of production activities. In a theoretical model, we show that any increase in the Southern capital stock relative to that of the North, or neutral technological progress in the South, will increase the relative wage of skilled workers in both countries due to a shift in production activities to the South. Corresponding to this change in the relative wage is an increase in the price index of Northern activities within each industry, relative to that of the South. We confirm that this change in relative prices occurred for the U.S. and other industrialized countries relative to their trading partners. We also estimate that 15-33% of the increase in the relative wage of nonproduction (or skilled) workers in the U.S. during the 1980's is explained by rising imports.

Suggested Citation

Feenstra, Robert C. and Hanson, Gordon H., Foreign Investment, Outsourcing and Relative Wages (May 1995). NBER Working Paper No. w5121. Available at SSRN: https://ssrn.com/abstract=225186

Robert C. Feenstra (Contact Author)

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
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916-752-9240 (Phone)
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National Bureau of Economic Research (NBER)

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Gordon H. Hanson

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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