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This paper surveys recent studies on trade and wage inequality. We …rst introduce some trade-based explanations for increased wage inequality. There are, however, a number of criticisms of this line of thought based on the "trade-wage inequality anom-aly, " the "price-wage anomaly, " and the small volume of trade. Mainly due to these criticisms, trade-based explanations for rising wage inequality have been limited in the economic literature. Rather, the primary explanations for wage inequality have been based on skill-biased technological change. Some trade models, however, have weak-ened the above criticisms, and more economists now argue that the e¤ect of trade, though relatively small compared to that of technological change, is more signi…cant than generally believed. Finally, we attempt to link new trends in inequality, such as job polarization and within-group inequality, to the trade and wage inequality litera-ture.

I develop a theoretical model of …rmssourcing decisions along the pro-ductivity dimension as in Antrás and Helpman (2004), while also incorporat-ing task trade as in Grossman and Rossi-Hansberg (2008). The combination of these two e¤ects permits a framework for sourcing strategies along two di-mensions, which generates results where …rms spread the production process of the …nal good over several di¤erent sources simultaneously. While repro-ducing the results from the aforementioned models, my model contributes re ned and more detailed predictions. Testing these on …rm-level data for Spanish manufacturing …rms, I …nd strong empirical support for the models predictions. I am grateful to Gaute Torsvik, Gregory Corcos and Wilhelm Kohler for their valueable comments. I would also like to thank Sigurd Birkeland for helpful discussions and suggestions. 97 1

This paper presents an economic geography model with two differentiated sectors that exhibit weaker inter and stronger intra-industry input-output linkages. Labour is also differentiated according to skills in a hierarchy of tasks they can perform. Globalisation occurs in two distinct phases, leading to the agglomeration of an industry (manufacturing) in the first wave, which is subsequently displaced by the other industry (services) when the second wave of globalisation takes place. Because of agglomeration effects, the increase in relative endowment of a factor may increase its relative wages, leading to more inequality. Within and between nations inequality can result.

Abstract: In this paper, we construct a North-South general equilibrium model of o¤shoring, highlighting the nexus among endogenous e¤ort-based labor productivity and the structure of wages. O¤shoring is modeled as international transfer of management practices and production techniques that allow Northern rms to design and implement performance compensation contracts. Performance-pay contracts address moral hazard issues stemming from production uncertainty and unobserved worker e¤ort. We …nd that worker e¤ort augments productivity and compensation of those workers assigned to more o¤shorable tasks. An increase in worker e¤ort in the South, caused by a decline in o¤shoring costs, an increase in worker skill or a decline in production uncertainty in the South, increases the range of o¤shored tasks and makes workers in the North and South better o¤. An increase in Southern labor force increases the range of o¤shored tasks, bene…ts workers in the North and hurts workers in the South. International labor migration from low-wage South to high-wage North shrinks the range of o¤shored tasks, makes Northern workers worse o¤ and Southern workers (emigrants and those left behind) better o¤. Higher worker e¤ort in the North, caused by higher worker skills or lower degree of production uncertainty, decreases the range of o¤shored tasks and

research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at

This paper studies the e¤ects of service o¤shoring on the skill composition of labor demand, using novel comparable data for nine Western European countries between 1990 and 2004. The empirical analysis delivers three main results. First, service o¤shoring is skill-biased, because it increases the demand for high and medium skilled labor and decreases the demand for low skilled labor. Second, the e¤ects of service o¤shoring are similar to those of material o¤shoring, both qualitatively and quantitatively. Third, the economic magnitude of these e¤ects is not large. JEL codes: F1.

We study the e¤ects of additional distortions or shocks, such as a fair-wage constraint and/or the possibility of o¤shoring unskilled jobs, in a two-factor general equilibrium model of unemployment with search frictions. While the direct point of impact of such shocks is on unskilled workers, we also nd interesting indirect spillover e¤ects on skilled workers. A binding fair-wage constraint increases the unskilled unemployment rate and can at the same time lead to a higher unemployment rate and a lower wage for skilled workers, as compared to an equilibrium where fairness considerations are absent or non-binding. Introducing o¤shoring of unskilled jobs in our search model always leads to an increase in skilled wage, a decrease in skilled unemployment and an increase in unskilled unemployment. Also, o¤shoring makes it more likely that the fair-wage constraint binds.

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