Outsourcing and the skilled–unskilled wage gap

Abstract

Within the context of a product variety model, this paper examines the impact of outsourcing of skill-intensive tasks on the skilled–unskilled wage gap. Outsourcing affects the wage gap through direct as well as indirect channels. While outsourcing decreases the effective wage of skilled workers in the services sector, owing to inter-sectoral labour mobility, its overall impact on the equilibrium skilled wage is positive. Through an increase in the size of external economies in the industrial sector, outsourcing can reduce the unskilled wage. In overall terms, outsourcing of skill-intensive tasks increases the skilled–unskilled wage gap.