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The race between offshoring and automation in explaining wage polarization

Published online by Cambridge University Press:  27 October 2023

Mafalda Pinho ,
Oscar Afonso Open the ORCID record for Oscar Afonso [Opens in a new window]  and
Tiago Sequeira Open the ORCID record for Tiago Sequeira [Opens in a new window]
Mafalda Pinho
Affiliation:
Faculty of Economics and Cef.up, University of Porto, Porto, Portugal
Oscar Afonso*
Affiliation:
Faculty of Economics and Cef.up, University of Porto, Porto, Portugal Faculty of Economics and CeBER, University of Coimbra, Coimbra, Portugal
Tiago Sequeira
Affiliation:
Faculty of Economics and CeBER, University of Coimbra, Coimbra, Portugal
*
Corresponding author: Oscar Afonso; Email: oafonso@fep.up.pt
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Abstract

Offshoring and automation are sources of wage polarization. We reassess these two determinants of wage polarization in a single directed technical change setup that encompasses routine and nonroutine production. We empirically establish the conditional positive relationship between automation and relocations on one side and wage polarization on the other. Theoretically, we show that wage polarization increases with automation and offshoring. In particular, wage polarization in favor of domestic (nonroutine) high(low)-skilled workers is positively affected by an increase in domestic (nonroutine) high(low)-skilled labor quantity and/or absolute productivity. Additionally, it is also positively influenced by a rise in foreign (routine) medium-skilled labor quantity and/or absolute productivity while negatively impacted by an increase in domestic (routine) medium-skilled labor quantity and/or absolute productivity. We show that the effect of offshoring on wage polarization diminishes with the degree of substitutability between routine and nonroutine sectors in the economy, with the share of machines in the production of intermediate goods, and with the scale effect. We quantitatively assess the impact through a thorough data-based calibration exercise, where the numerical results confirmed the theoretical findings.

Keywords

Directed technical changeautomationoffshoringinternational tradewage polarization
Type
Articles
Information
Macroeconomic Dynamics , First View , pp. 1 - 35
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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Footnotes

†

Cef.UP is funded by Portuguese public funds through FCT – Fundação para a Ciência e a Tecnologia, I.P., in the framework of the project with references UIDB/04105/2020 and UIDP/04105. CeBER’s research is funded by national funds through FCT – Fundação para a Ciência e a Tecnologia, I.P., Project UIDB/05037/2020

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