Offshoring and the distribution of skills

Abstract

We develop a two-sector model to explore how skill distribution affects trade in final goods and offshoring. We show that when countries differ in skill abundance, wage disparities create opportunities for offshoring. In contrast, when countries vary in skill diversity but share the same median skill, symmetric skill distributions render offshoring infeasible. We also find that offshoring can result in the relative price under offshoring being lower than each country's autarky relative price if the gap between the median skill levels of the two countries is sufficiently large. Finally, we demonstrate that an individual's industry of employment primarily determines how they are affected by trade in final goods, whereas their occupation (tasks) shapes how they are impacted by offshoring.