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Outsourcing and Your Collar's Color

In order to assess the effects of increased outsourcing on the relative demand for skilled and unskilled labor, it is crucial to understand whether outsourcing is a complement or a substitute for each kind of labor. Using the traditionally employed log-log framework, Amiti and Wei (2006) find that outsourcing of goods and labor are complements. Using the same methodology but differentiating between skilled and unskilled labor, one would conclude that outsourcing acts as a complement to unskilled labor but as a substitute for skilled labor. This paper proposes an improved methodology which uses estimated prices for outsourcing instead of other proxies (such as its intensity)and a complete factor cost-share system of equations to find the completely opposite result, that is, outsourcing is a substitute for unskilled labor and a complement for skilled labor. This result is consistent with the findings of the literature on outsourcing and the wage gap.