Offshoring of medium-skill jobs, polarization, and productivity effect: Implications for wages and low-skill unemployment

We examine the effects of endogenous offshoring on cost-efficiency, wages and unemployment in a task assignment model with skill heterogeneity. Exact conditions for the following insights are derived. The distributional effect of offshoring high- low-skill-intensive tasks is similar to unskilled- skill-biased technology changes, while offshoring medium-skill-intensive tasks induces wage polarization. Offshoring improves cost-efficiency through international task reallocation and puts a downward pressure on all wages through domestic skill-task reallocation. If elasticities of task substitution are low high, the downward pressure on wages in neighbouring skill segments is low high with a net effect of higher lower wages and employment.