The recent economic performance of less-skilled Americans is an important policy topic and the subject of intense academic attention. Over the last two decades, the wages of low-skilled workers have fallen dramatically, both in absolute terms and relative to those of high-skilled workers. The two most widely cited explanations for the rise in wage inequality are skill-biased technical change and trade with low-wage countries. Despite the vast literature, there is little agreement among researchers on the relative contributions of trade, technology, and other factors to the recent wage changes. This project will develop an empirical framework that identifies how trade and technology affect factor prices and apply the framework to data from developed and developing countries. The literature on trade and wages focuses overwhelmingly on trade in final goods. A substantial portion of U.S. trade, however, is the result of outsourcing -- the import of intermediate inputs by domestic firms. Outsourcing by U.S. firms moves labor-intensive tasks, such as the production of components or the assembly of final goods, to low-wage countries. This changes the range of production activities that U.S. firms perform at home without necessarily changing the final goods that they produce. In this way, the effects of trade can look like the effects of technical change. This project will develop an empirical methodology that can distinguish these. It will be demonstrate that estimating the effects of trade and technology on factor prices depends crucially on using the correct measure of productivity. The framework that will be developed makes it possible to decompose changes in productivity into the portion attributable to innovation, measured using industry data on R&D spending and investments in information technology and new capital equipment, and the portion attributable to outsourcing, measured using industry data on the import of intermediate inputs from abroad. The framework will first be applied to data on manufacturing industries in the United States. This will allow estimates of the relative contributions of technological change and globalization to recent U.S. wage changes. In addition, several complementary lines of research we will be pursued which will: (1) extend the analytical framework to examine the effects of foreign outsourcing and imports of capital and technology on labor markets in Mexico, (2) examine whether outsourcing by U.S. firms is contributing to the integration of labor markets in low-wage countries in the Western Hemisphere, and (3) measure the extent of outsourcing between developed and developing nations in Asia and estimate the effect of outsourcing on labor markets in the region.
