International Outsourcing, Technological Change, and Wage Inequality

Abstract

This paper analyzes the impact of international outsourcing on UK wage inequality during the 1990s by applying the mandated wage approach proposed by Feenstra and Hanson (1999). The methodology is extended in order to obtain additional insight into the relative importance of the factor and sector bias of international outsourcing and technological change. The results indicate that technological change is the predominant force behind the increase in wage inequality, but international outsourcing also contributed significantly. In explaining the increase in wage inequality the factor bias of technological change was slightly larger than its sector bias, while for international outsourcing the sector bias was much more important. The relative importance of the two effects hinges crucially on the estimated rate of productivity passthrough.