economy, e.g., the skill ratio should on the one hand increase as it is the relative low
skill intensive production part that gets relocated. On the other hand, due to the in-
creasing effect on relative wages of the high skilled, there should be a substitution effect
towards more low skill intensive production. In the aggregate (that is in the focus of
the Feenstra and Hanson model), these effects are likely to sum up to zero. Proposition
1 summarizes this pattern.
Proposition 1: Concerning the aggregated whole economy, the high skilled labor ratio is
assumed to increase if low skill intensive production fragments are relocated abroad. However,
since the decrease in low skilled labor demand increases relative high skilled wages, there should
also be a substitution effect towards more low skilled labor. Summing up, the implication of
offshoring on the skill ratio of production is assumed to be ambiguous in the aggregate.
One theoretical model that explicitly focus on the effects on the industries’ skill ratio is
the already mentioned framework of Arndt (1997, 1998b,a).4 Assuming two industries
with two kinds of labor, the model focus on more disaggregated industry levels and
investigates offshoring within a traditional Heckscher-Ohlin framework. The essence
of the results is that the effects on relative wages do not depend on the skill intensity
of the relocated production block. By contrast, the skill intensity of the industry where
offshoring takes place is the driving parameter: Due to the small country assumption,
offshoring enables an additional wage premium since the industries’ unit costs decrease.
Depending on the relative skill intensity of the respective industry, this wage premium
gets either payed to the high or the low skilled worker. In this form, offshoring induces
a similar skill bias already known from technological progress. Thus, relative high skill
wages increase if offshoring takes place in the relative high skill intensive industry and
vice versa for the relative low skill intensive one. The effects are summarized in Figure
1.
As can be seen in this Pearce-Lerner diagram (with high skilled labor (H) on the
vertical and low skilled labor (L) on the horizontal axis), there exist two industries, the
relative high skill intensive industry (X) and the relative low skill intensive one (Y).
The factor intensities are given by the two expansion paths X and Y. At the initial
4This model got extended in several contribution in order to investigate different aspects of offshoring
effects. Deardorff (2001a,b) e.g. illuminates the importance of the relative factor intensity of the
relocated production blocks. Egger and Falkinger (2003) consider different modes of final goods pro-
duction and examine several different equilibrium situations in order to determine the dominance
of the factor or the sector bias of international outsourcing. Recently, Kohler (2009) investigates
differences between the sector bias models and the literature that meanwhile emerged on task trade,
initiated by Grossman and Rossi-Hansberg (2008). In this paper Kohler specifically mentions the
importance of offshoring heterogeneous tasks at the industry level and thus, the sector bias of off-
shoring and how this sector bias model of offshoring can be reconciled with the task trade framework
of Grossman and Rossi-Hansberg.