Offshoring, the threat effect, and wage inequality

Abstract

The effects of offshoring threats on the domestic skill premium are widely accepted, but theoretically unanalyzed. This study constructs a simple theoretical model based on task‐trading offshoring and collective wage bargaining models to examine the effects of a firm's offshoring threat on the domestic skill premium. Theoretical analysis suggests that under a moderate demand for the final good, the possibility of offshoring could lower the wages of unskilled domestic workers, who are vulnerable to offshoring, more than the wages of skilled domestic workers. Thus, even when there is no actual offshoring, the skill premium between the two types of workers increases.