Offshoring and Directed Technical Change

Daron Acemoglu, Fabrizio Zilibotti and Gino Gancia

No 9247, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: To study the short-run and long-run implications on wage inequality, we introduce directed technical change into a Ricardian model of offshoring. A unique final good is produced by combining a skilled and an unskilled product, each produced from a continuum of intermediates (tasks). Some of these tasks can be transferred from a skill-abundant West to a skill-scarce East. Profit maximization determines both the extent of offshoring and technological progress. Offshoring induces skill-biased technical change because it increases the relative price of skill-intensive products and induces technical change favoring unskilled workers because it expands the market size for technologies complementing unskilled labor. In the empirically more relevant case, starting from low levels, an increase in offshoring opportunities triggers a transition with falling real wages for unskilled workers in the West, skill-biased technical change and rising skill premia worldwide. However, when the extent of offshoring becomes sufficiently large, further increases in offshoring induce technical change now biased in favor of unskilled labor because offshoring closes the gap between unskilled wages in the West and the East, thus limiting the power of the price effect fueling skill-biased technical change. The unequalizing impact of offshoring is thus greatest at the beginning. Transitional dynamics reveal that offshoring and technical change are substitutes in the short run but complements in the long run. Finally, though offshoring improves the welfare of workers in the East, it may benefit or harm unskilled workers in the West depending on elasticities and the equilibrium growth rate.

Keywords: Directed technical change; Growth and productivity; Offshoring; Skill premium (search for similar items in EconPapers)
JEL-codes: F43 O31 O33 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-lab and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Offshoring and Directed Technical Change (2015)
Working Paper: Offshoring and Directed Technical Change (2014)
Working Paper: Offshoring and directed technical change (2014)
Working Paper: Offshoring and Directed Technical Change (2012)
Working Paper: Offshoring and Directed Technical Change (2012)
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