Feenstra and Hanson: Global Production Sharing and Rising Inequality

FEENSTRA, RC, and GH HANSON. 2001. Global Production Sharing and Rising Inequality: A Survey of Trade and Wages. NBER Working Paper.

"One of the most widely-discussed public policy issues in the United States and many other industrial countries is the decline in the wages of less-skilled workers during the 1980s and 1990s, both in real terms and relative to the wages of more-skilled workers. The question is, what factors account for this change?...In this survey, we present a contrary point of view, and argue that international trade is indeed an important explanation for the increase in the wage gap. Our argument rests on the idea that an increasing amount of international trade takes the form of trade in intermediate inputs. This is sometimes called 'production sharing' by the companies involved, or simply 'outsourcing'. Trade of this type affects labor demand in import-competing industries, but also affects labor demand in the industries using the inputs. For this reason, trade in intermediate inputs can have an impact on wages and employment that is much greater than for trade in final consumer goods. As we shall argue, trade in inputs has much the same impact on labor demand as does skill-biased technical change: both of these will shift demand away from low-skilled activities, while raising relative demand and wages of the higher skilled" (1-2).

From the late 70s to the mid 90s, real wages of those with a high school education fell by 13.4%.