erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

 

Effects of Outsourcing on Wage Inequality and Skill Formation

Selin Sayek (Bentley College, USA)
M. Fuat Þener (Union College USA)

Abstract

This paper investigates the effects of multinational firms' investment on wage inequality in both the host and the source economy. We develop a North-South product cycle model of endogenous growth without scale effects, where both innovation and skill acquisition rates are endogenously determined. The model shows that an increase in foreign direct investment (FDI), captured as an increase in the share of basic production in the South, or an improvement in the technology of outsourcing increases both the extent of outsourcing and the rate of innovation in the North. Additionally, an increase in FDI or an improvement in outsourcing technology puts upward pressure on the wage differential between skilled and unskilled in both the North and the South. The rise in wage inequality in turn induces a higher percentage of the population to upgrade their skills.

 

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