Intellectual Merit: The value of world trade as a share of world output, the sales of foreign affiliates of multinational firms as a share of world output, and the developing world's share of this global activity have grown tremendously over the last few decades. Over this period there was also a large increase in income inequality, both in developed and developing countries, as measured for example by the rise in the relative wage of skilled to unskilled workers - the skill premium. The changing nature of globalization and the increase in the skill premium raise a set of important questions. To what extent can the growth of trade and offshoring account for the rise in the skill premium in developed and developing countries? What are the different implications for the skill premium in developed countries of globalization with developing countries versus globalization with developed countries? What would be the implications for the skill premium in a country such as the United States of further development in a country such as China? In this proposal the PI's describe a research agenda to address these and other questions, building a quantitative model of trade, offshoring, and the skill premium in developed and developing countries. The framework features two independent sources of comparative advantage (factor endowment differences and technological differences) and skill-biased technology (more efficient producers employ a relatively higher share of skilled workers). The PI's show that a reduction in trade and/or offshoring costs induces a reallocation of resources both towards sectors that are intensive in a country's abundant factor (generating a Stolper-Samuelson effect that increases the skill premium in skill-abundant countries and reduces it in skill-scarce countries) and within sectors towards more efficient producers that are more skill intensive(generating a skill-biased technology effect that increases the skill premium in all countries). Larger dispersion in productivities across producers weakens the Stolper-Samuelson effect and strengthens the skill-biased technology effect, while offshoring strengthens both. The PI's then use a parameterized version of the model that matches salient features of U.S. data on trade and offshoring to study the impact on the skill premium of changes in the extent of globalization (i.e. the shares of trade and offshoring in output), in the composition of globalization (i.e. the relative importance of skill-abundant and skill-scarce countries in the global economy), and the type of globalization (i.e. the relative importance of trade and offshoring). In work-to-date, the PI's find that the skill-biased technology effect is stronger than the Stolper-Samuelson effect. In response to the three-fold increase in the extent of globalization in the U.S. over the last 40 years, the model generates an increase in the skill premium of 4% to 6% in the U.S. (or 1/6 to 1/4 of the rise of the college wage premium during this period) and 5% in skill-scarce countries.
Broader Impact: The work contributes to the active debate on the link between globalization and inequality. The PI's provide a quantitative framework to assess the implications for the skill premium of policies that foster international trade and offshoring. The analysis also sheds light on the differential impacts on U.S. inequality of trade and offshoring integration with developed and developing nations.
