Offshoring - Effects on Technology and Implications for the Labor Market

Abstract

I propose a through which imports of low-skilled intermediates (offshoring) benefit both skilled and unskilled workers by inducing capital deepening and innovation in developed countries. Data strongly support the presence of this channel. Offshoring is associated with large increases in technology variables -- equipment-labor ratio and R&D intensity -- and labor outcomes -- employment and wage bills of skilled and unskilled workers. I formalize this channel in a structural model. Results show that it is the dominant mechanism through which offshoring affects labor outcomes, offsetting negative substitution effects on unskilled wages, and generating a large welfare gain.