Trade and Inequality: The Role of Vertical Specialization and Outsourcing

This article considers how the process of outsourcing results in economic changes in factor usage and productivity in developed countries. Some scholars have incorrectly interpreted these observed changes as being the result of biased skilled-labor using technological change. This article examines the size and significance of vertical specialization, and describes how outsourcing contributes to increased inequality in developed nations. The effects of outsourcing on labor market outcomes in the developing world are also explored. The author describes the potential implications and significance of outsourcing services. The major conclusion is that the downward pressure on the wages of the unskilled is likely to continue.