Outsourcing, Innovation, and Wage Inequality in the United States: What Happened to the Outsourcing Effect on Wage Inequality in the 1970s?

A puzzle of outsourcing is why the effects of outsourcing on wage inequality found in most empirical papers on the 1980s can not be seen when investigating the 1970s. Two additional questions of this puzzle are: did wages for all skilled labor decrease because of outsourcing? Second, is the falling relative wage of skilled labor to unskilled labor caused by an increasing wage of unskilled labor or a decreasing wage of skilled labor? To understand the puzzle, this paper simplifies theoretical model and employs it to analysis this issue. The authors find that there are two possible reasons for this phenomenon. One is the skilled/unskilled labor endowment change and the other is a change in skilled/unskilled labor intensity of the outsourcing industry.