Outsourcing and Wages

A news story reports

Princeton professors Gene Grossman and Esteban Rossi-Hansberg argued that wages for the least-skilled blue collar jobs had been rising since 1997 as outsourcing boosted productivity.

The intuition of their argument can be found in this paper.

the labor-intensive industry enjoys the greater increase in profitability at the initial factor prices. As it expands relative to the skill-intensive sector, the economy-wide demand for low-skilled labor grows. Only when the domestic wage rises to fully offset the induced increase in productivity can the profit opportunities in both industries simultaneously be eliminated. In the process, the wage of high-skilled labor is left unchanged. Again, we see the strong analogy between improved opportunities for offshoring and labor-augmenting technological progress.

I cannot say that I particularly trust this paper's approach. But I trust even less the view that outsourcing necessarily lowers domestic real wages.

Thanks to Greg Mankiw for the pointer.

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