The wage effects of production fragmentation

by Oskari Rekola

Institution: University of Helsinki
Year: 2015
Keywords: Kansantaloustiede: Yleinen linja
Record ID: 1137558
Full text PDF: http://hdl.handle.net/10138/153570


Evolving technology, improvements in production co-ordination and new communication tools enable companies to offshore parts of their value chain to foreign locations with lower factor costs. Literature seems to highlight two effects of offshoring: the productivity effect, which stems from the gains from trade, and the terms-of-trade effect, which is linked with the vanishing effect of distance on wages. To examine the role of wages in both the offshoring and receiving parties, I choose two approaches, the static Heckscher-Ohlin model and the static and dynamic Ricardian model. With the dynamic version of the Ricardian model, I will consider the long-run effects. I will be using the dynamic Ricardian model to consider the long-run effects. In the HO-model there are two inputs, skilled and unskilled labour, and two countries: North, which has a technical advantage with skilled labour, and South, which has a technical advantage with unskilled labour. With offshoring, the activity without advantage can be transferred abroad. With sufficiently high differences in factor endowments, the countries specialize and the wages for both skilled and unskilled labour are higher in the country with comparative advantage in skilled labour. If both countries continue diversifying instead of specialising, the unskilled labour wages in the North eventually fall below those in the South. The Ricardian model examines the short and long-run effects of decentralized production (offshoring). Technology levels are fixed in the short-run version but endogenous in the long-run version of the Ricardian model. In the short run, a sufficiently large and unexpected increase in offshoring is harmful to the wealthy country (North) and beneficial to the poor country (South). However, in the long run, the adverse effects in the wealthy country could be overcome through reallocating resources into research. The negative short run terms-of-trade effect is weaker in the long run. Whether the long-run total effect is positive or negative to the rich country depends on the efficiency of the reallocation of labour from production into research, relative to the pace at which production is decentralized. Moreover, we see that in the long run, the poor country is worse off due to its focus on offshore production and services instead of research. Its benefit then depends only on the global efficiency effect though increased trade volumes. Vain tiivistelmä. Opinnäytteiden arkistokappaleet ovat luettavissa Helsingin yliopiston kirjastossa. Hae HELKA-tietokannasta (http://www.helsinki.fi/helka/index.htm). Abstract only. The paper copy of the whole thesis is available for reading room use at the Helsinki University Library. Search HELKA online catalog (http://www.helsinki.fi/helka/index.htm). Endast avhandlingens sammandrag. Pappersexemplaret av hela avhandlingen finns för läsesalsbruk i Helsingfors universitets bibliotek. Sök i HELKA-databasen (http://www.helsinki.fi/helka/index.htm).