UNU-MERIT Working Papers Series

Offshoring of medium-skill jobs, polarization, and productivity effect: Implications for wages and low-skill unemployment

Ehsan Vallizadeh, Joan Muysken & Thomas Ziesemer #2015-004

We examine the effects of endogenous offshoring on cost-efficiency, wages and unemployment in a task assignment model with skill heterogeneity. Exact conditions for the following insights are derived. The distributional effect of offshoring (high-) low-skill-intensive tasks is similar to (unskilled-) skill-biased technology changes, while offshoring medium-skill-intensive tasks induces wage polarization. Offshoring improves cost-efficiency through international task reallocation and puts a downward pressure on all wages through domestic skill-task reallocation. If elasticities of task substitution are low (high), the downward pressure on wages in neighbouring skill segments is low (high) with a net effect of higher (lower) wages and employment.

Keywords: Task Assignment, Offshoring, Skills, Cost-efficiency Effect, Equilibrium Unemployment

JEL Classification: F16, F66, J21, J24, J64

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