Two‐Way Outsourcing,International Migration,and Wage Inequality

This article develops a general equilibrium model with a vertical production structure to examine the relationship between offshore outsourcing and international migration, especially emphasizing their effects on the wages of skilled and unskilled workers. Two‐way outsourcing (simultaneous insourcing and outsourcing) in skilled‐labor–intensive services arises because of product differentiation and scale economies, and outsourcing in unskilled‐labor–intensive processing occurs because of factor endowment differences. The tractability of the model allows us to rank outsourcing and migration, according to the wages of both types of workers. Finally, we also analyze under what conditions outsourcing and international migration are complements or substitutes.