Offshoring in a Knowledge Economy

Innovation and Economic Growth

Article Snapshot


Pol Antras, Luis Garicano and Esteban Rossi-Hansberg


Quarterly Journal of Economics, Vol. 121, No. 1, pp. 31-77, Feb. 2006


This paper looks at how cross-border work arrangements affect firms and wages.

Policy Relevance

Communications technology affects organization, wage rates, and wage equality.

Main Points

  • New communications technology allows firms to do routine work in other countries, e.g. data entry, while complex tasks like research are done in the home country.
    • Countries with low-skill workers (“southern”) benefit as these workers can join teams with high-skill workers (“northern”).

  • Occupational choices change: In the south, more people choose to become low-skill workers; in the north some workers become managers.

  • Firms fail and jobs are created in the south; in the north, firms are created and jobs lost in the north.

  • Real-world globalization results in higher wages being paid to offshore workers who work for multinational firms than to workers who work for domestic firms.

  • Our theory explains why globalization tends to increase wage inequality everywhere:
    • The best low-skill workers are in higher demand in the south.
    • The best northern high-skill workers are in higher demand for management tasks.

  • Factors that tend to increase offshoring are lower communications costs, and more skill differences between workers in different regions.

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