Can offshoring cut inequality?

The article attached is aimed at addressing the question of if offshoring can cut inequality. Over the past 30 years offshoring has been a major trend in the U.S. labor market.  The implications for wages and skill premia are still debated. The iPod made by Apple for example, is designed in the U.S., but is made of components that are produced all over the world and then assembled in China. Although the low skill labor production jobs are offshored, there are many high-skilled engeniring jobs, as well as low-skill retail jobs that are created in the U.S. If there were more limited offshoring some of the production jobs that have been outsourced may have stayed within the U.S. borders, which would increase demand for low-skill production workers. However, this would lead to an increase in the price of the iPod. The variety of iPods may not have been as profitable to introduce and develop if labor costs were higher, as they would have been without offshoring. These different labor costs may have caused iPods and other products to be designed differently.

By lowering the cost of work performed by low-skill workers, offshoring opportunities increase the relative price of skill-intensive products. This price effect tends to spur innovation in the skill-intensive sector. Counteracting this, however, offshoring opportunities expand the market for technologies used by low-skill labor. This market-size effect tends to induce innovations in less skill-intensive sectors.

The author then goes on to talk about the key finding is which force dominagtes depends on the level of offshoring. For low levels of offshoring the price effect dominates, so greater offshoring opportunities initially induce skill-biased technical change. If the offshoring level is high the opposite pattern occurs. Thus, the inequality-promoting effect of offshoring is greatest at the beginning. The reason for this switch in the direction of technological progress is that more offshoring increases the demand for labor abroad and thus wages in the East. In turn, the closing of the wage gap between countries mutes the price effect that was fuelling skill-biased innovation. The author found that offshoring first increases wage inequality in the West. However, as offshoring continues, technical change eventually changes direction and may even lower the skill premium. Under mild conditions, the same pattern can hold in the East as well.

The author concludes by saying that according to the theory, the implications of offshoring are very different once its volume reaches a critical level and if wages in China keep rising at current rates further offshoring may induce innovation in less skill-intensive sectors. The future effects of offshoring could be quite different from its past impact.