Outsourcing and wage inequality in a dynamic product cycle model

Date
2006
Authors
Sayek, S.
Şener, F.
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Source Title
Review of Development Economics
Print ISSN
1363-6669
Electronic ISSN
1467-9361
Publisher
Wiley-Blackwell Publishing Ltd.
Volume
10
Issue
1
Pages
1 - 19
Language
English
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Abstract

This paper constructs a dynamic North-South trade model with outsourcing and endogenous innovation. Production of high quality goods is first performed in the North (Northern phase), then split between the North and the South (Outsourcing phase), and finally shifted to the South (Southern phase). This cycle is reignited whenever a Northern firm innovates a higher quality product. We find that an increase in the fraction of outsourced production raises the Northern skill premium unambiguously, while raising the Southern skill premium if and only if the skill intensity of outsourced production is higher than that of local Southern production. © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.

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