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Overview: International outsourcing by multinational firms represents an important new aspect of modern world trade. Recently this phenomenon has received increasing attention because of its labor-market implications. A theoretical link between outsourcing and wage inequality is established in a simple general equilibrium model. In the model, a manufacturing sector assembles a final good from a continuum of intermediate inputs whose production requires skilled and unskilled labor and capital. This paper shows that outsourcing and wage inequality may be positively or negatively related and identify the conditions for each case.
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