December 2005

IZA DP No. 1907: Specialization, Outsourcing and Wages

published in: Review of World Economics, 2009, 145 (1), 57-73

This paper studies the impact of outsourcing on individual wages. In contrast to the standard approach in the literature, we focus on domestic outsourcing as well as foreign outsourcing. By using a simple theoretical model, we argue that, if outsourcing is associated with specialization gains arising from an increase in the division of labor, domestic outsourcing tends to increase wages for both unskilled and skilled labor. We use a panel data set of workers in Danish manufacturing industries to show that domestic and foreign outsourcing affect wages as predicted by the theory.