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Title: Productivity, Employment and Wage Inequality in U.S. Manufacturing that Offshoring Tasks to Low-Wage Countries

Citation Type: Miscellaneous

Publication Year: 2011

Abstract: This paper offers a theoretical framework to help study the effects of offshoring on industrial productivity, employment and wage inequality. I then test the implication of the model, using U.S. industry trade data that is matched to individual worker data from the Current Population Survey. I extend a multi-sector version of Bernard, Redding and Schott (2007) and explicitly model vertical fragmentation of production tasks across countries as motivated by Grossman and Rossi-Hansberg (2008). Wage inequality across and within industries arises due to an imperfect labor market with a notion of fairness, where wages depend on the productivity of the firm they work in. A fall in offshoring cost increases domestic aggregate productivity and changes the labor composition across and within industries. Labor demand and relative wages decrease for tasks that are easier to offshore. The empirical findings are consistent with models predictions. Offshoring, especially to low-wage countries, significantly increases the probability of workers switching occupations and industries. Offshoring also raises the risk of becoming unemployed and the duration of the unemployment. For occupations with higher offshorability, these switchingand unemployment pressures are stronger. This reallocation also affects wages. One standard deviation increase in offshoring decreases the average weekly wage about 5 percent (or $37) for an occupation with average offshorability, and offshoring can explain about a quarter of the increasing in wage inequality from 1989 to 2005.

User Submitted?: No

Authors: Zhang, Nan

Publisher: University of Virginia

Data Collections: IPUMS CPS

Topics: Labor Force and Occupational Structure, Other

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