Feenstra: Integration of Trade and Disintegration of Production in the Global Economy

RC Feenstra, Program on Pacific Rim Business and Development, and Davis University of California, “Integration of trade and disintegration of production in the global economy” (1998).

The author does a comparative analysis of different methods for measuring the amount of outsourcing to foreign destinations. Fennstra also argues that this outsourcing has increased steadily since the 1970s.

The author also explores globalization, with an eye towards the impact on wages of those who are arguably most vulnerable in an economy: those with low levels of skill. "In fact, I will argue that by allowing for trade in intermediate inputs, globalization has an impact on employment an wages that are observationally equivalent to the changes induced by technological innovation. The idea that globalization has a minor impact on wages relies on a conceptual model that allows only for trade in final goods, thereby downplaying or ignoring the outsourcing of production activities. The empirical evidence supports a much more prominent role for the optimal decisions of firms to allocate production worldwide, that in turn needs to be incorporated into our theoretical framework" (32).

"...outsourcing has a qualitatively similar effect on reducing the demand for unskilled relative to skilled labor within an industry as does skill-biased technological change" (41).

The author then explores some of the policy implications for the decreased demand of unskilled workers that arises out of an increased drive to outsource production.

"The world has become increasingly integrated through trade in the last several decades, and the structure of trade has shifted towards more outsourcing...I have suggested that to understand the implications of this change, we need to use a conceptual framework where firms allocate their production activities worldwide. While many details of this framework remain to be worked out...I would like to speculate on the type of results that it might yield...First, the globalization of production should bring with it gains from trade that are likely to be substantial...However, we must ask whether these efficiency gains bring costs in terms of the distribution of income" (47).

"If we want to move beyond the possibility of Pareto gains to making actual compensation, it appears that we should give serious consideration to wage subsidies for low-skilled workers" (48).