Global Sourcing and Relative Wages with A Nontradable Good

Global Sourcing and Relative Wages with A Nontradable Good

In this paper I introduce a new concept of a global sourcing economy and then investigate the effects of global sourcing on relative wages in a general equilibrium model. From the model I derive the theoretical relative wage equations that show different predictions compared with the existing outsourcing literature. Global sourcing has a negative association with the relative wage of skilled labor to less skilled labor within tradable industry, while it is positively associated with the relative wage of skilled labor to less skilled labor within non-tradable industry. This result is contrasted with the notion that outsourcing is positively correlated with the relative demand for skilled labor. Another finding is that the size of the share of mobile labor used to produce non-traded goods plays a key role in deciding the magnitude of global sourcing effect on the wage inequality within nontradable industry and hence the overall wage inequality.