Afternoon Must-Read: Daron Acemoglu et al.: Offshoring and Skill-Biased Technical Change

Daron Acemoglu et al.: Offshoring and Skill-Biased Technical Change: “When labour is sufficiently cheap abroad…

…firms have incentives to offshore low-skill tasks and invest in skill-biased technologies at home…. The production structure of Apple’s iPod illustrates some of the potential effects…. Though most production jobs are offshored, a significant number of high-skill engineering jobs and low-skill retail jobs are created in the US, and more than 50% of the value added of the iPod is captured by domestic companies. With more limited offshoring, some of the production jobs may have stayed within the US borders, increasing the demand for the services of low-skill production workers. But this would have also increased the cost and price of iPods, reducing employment not only in engineering and design occupations but also in retail and other related tasks…. The reason for this switch in the direction of technological progress is that more offshoring increases the demand for labour abroad and thus wages in the East. In turn, the closing of the wage gap between countries mutes the price effect that was fuelling skill-biased innovation…. Offshoring first increases wage inequality in the West. However, as offshoring continues, technical change eventually changes direction and may even lower the skill premium…