Trading Tasks and Skill Premia

Transcription

1 Journl of Finnce nd Economic Volume 3, Iue 3 (215, IN E-IN X Publihed by cience nd Eduction Centre of North Americ Trding Tk nd kill Premi herif Khlif 1* & Evelin Mengov 2 1 Deprtment of Economic, teven Mihylo College of Buine nd Economic, Cliforni tte Univerity, Fullerton 2 College of Buine, Governor tte Univerity * Correpondence: herif Khlif, Deprtment of Economic, teven Mihylo College of Buine nd Economic, Cliforni tte Univerity, Fullerton, CA 92834, U..A. E-mil: khlif@fullerton.edu DOI: /jfe.v3i3p46 UR: Abtrct The 2x2x2 eckcher-ohlin model predict tht trde openne cue the kill premium to incree in the kill bundnt developed countrie, nd to decree in the kill crce developing countrie, fter trde openne. Empiricl evidence, hoever, ho tht the kill premium declined in ome developing countrie, hile other experienced n incree in ge inequlity. Thi pper develop North-outh model, here firm produce lo-killed nd high-killed intenive good. The production of unit of either good involve continuum of -tk nd -tk. The -tk cn be performed by lo-killed orker only, nd the -tk cn be performed by high-killed orker only. The Northern firm cn produce the tk in their hedqurter, or offhore the tk to the outh. The reult ugget there i threhold kill bundnce level in the outh, bove hich countrie experience n incree in the kill premium fter n improvement in the offhoring technology, nd belo hich countrie experience decree in the kill premium. In thi context, the North offhore the -tk to countrie tht re reltively more bundnt in high-killed lbor, nd -tk to countrie tht re reltively more bundnt in lo-killed lbor. Therefore, countrie tht become the hot of -tk experience decree in the kill premium, becue there ill be higher demnd for their lo-killed orker, hile thoe tht become the hot of the -tk ill experience n incree in the kill premium, becue there ill be higher demnd for their high-killed orker. Thi ccount for the ymmetric pttern of kill premi in the outh. JE Clifiction: F16, J31, O34 Keyord: trding tk, kill premium, lbor mrket 1. Introduction The 2x2x2 eckcher-ohlin model predict tht trde openne induce countrie to export the good tht intenively ue the reltively bundnt fctor of production, nd import the good tht intenively ue the reltively crce fctor of production. Accordingly, kill bundnt developed countrie re expected to export the good tht intenively ue high-killed orker. Thi led to n incree in the reltive price of the high-killed intenive good, rie in the reltive demnd for high-killed orker, nd conequently n incree in the kill premium. On the other hnd, kill crce developing countrie re expected to export the good tht intenively ue lo-killed orker. Thi led to n incree in the reltive price of the lo-killed intenive good, rie in the reltive demnd for lo-killed orker, nd conequently decree in the kill premium. Theoreticl prediction, ~ 46 ~

2 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, 215 hoever, re not upported by the oberved empiricl evidence. ome developing countrie experienced n incree in the kill premium, hile other itneed decline fter trde openne. Evidence to the ymmetric pttern of kill premi in the developing countrie i documented by Freemn nd Ootendorp (21, non nd rrion (1995, Robbin (1996, Wood (1997, nd Goldberg nd Pvcnik (24. Figure 1 ho the premium decreing ith openne in ome countrie, nd the premium increing ith openne in other countrie. A thi poe chllenge to trde theorit, ome tudie ttempted to ddre thi puzzle in order to reolve the dicrepncy beteen the prediction of the theory nd the empiricl evidence. Thi pper, hoever, build on the contribution of Gromn nd Roi-nberg (26, 28, & 212. In their pper, they focu on the impct of offhoring on ge in the North. The ignificnce of interntionl offhoring nd frgmenttion of production h been groing round the orld in recent yer. Firm re ubcontrcting n ever-increing proportion of their ctivitie, uch the production of intermedite input, ervice, nd mot recently - pecific tk. The flourihing ee ith hich hundred of divere ctivitie nd tk could be offhored to ditnt loction nody, h prompted mplifying reerch in dometic nd interntionl outourcing iue. One importnt pect of thee ne trend in globliztion, i the impct on the kill premi in both the country-ource of offhoring, nd the country-hot. The mjor prt of current reerch h focued on the conequence of outourcing ctivitie in vriou prt of the orld, including developing countrie endoed ith predominntly chep lbor, upon the lbor in developed countrie. The pttern of kill premi in the divere developing orld hve ttrcted reltively le ttention. The purpoe of our reerch i to complement the current dicuion by looking into the effect of globliztion on lbor mrket in the outh. Our pper develop model of trding tk beteen to countrie: the North nd the outh. The North i more kill-bundnt compred to the outh. Firm in both countrie produce lo-killed intenive good nd high-killed intenive good. There re to fctor of production: lo-killed orker nd high-killed orker. The production of unit of either good involve continuum of tk nd continuum of tk. The tk cn be performed by lo-killed orker only, nd the tk cn be performed by high-killed orker only. If tk i performed offhore, the firm ber n extr cot of coordinting production nd communicting ith ditnt orker. Thi cot vrie by tk, ome require fce-to-fce contct or interction beteen orker, hile other re eier to perform from ditnce. In thi context, there exit threhold tk nd threhold tk in every indutry, belo hich ll tk re offhored to the outh, nd bove hich ll tk re produced in the hedqurter in the North. In the outh, ome of the high-killed nd lo-killed orker upply their lbor to the firm tht erve n externl provider of tk to the Northern firm. The ge of the high-killed nd the lo-killed orker re eighted verge of the higher ge of thoe orking in the offhoring firm, nd of the loer ge of thoe hired by locl producer in the outh. The umption tht the ge of thoe employed in firm engged in offhoring re higher thn the ge of thoe orking in locl firm i jutified by empiricl evidence in Aitken, rrion, nd ipey (1996, nd ethupthy (213. The reult ugget tht the kill premium in the North incree ith n improvement in the technology of offhoring, under certin condition. On the other hnd, there i threhold kill bundnce level in the outh. Countrie ith kill bundnce bove thi threhold, re reltively more endoed ith high-killed orker. The Northern firm offhore their tk to thee countrie to benefit from the reltively loer lbor cot. Thi men tht higher proportion of the high-killed orker in the outh ill be erning the higher ge, nd the incree in their proportion ill cue n incree in the eighted verge ge of the high-killed orker, nd ccordingly n incree in the kill premium. Countrie ith kill bundnce belo thi threhold, re reltively more endoed ith lo-killed orker. The Northern firm offhore their tk to thee countrie to benefit from the reltively loer lbor cot. Therefore, higher proportion of the lo-killed orker in the outh ill be erning the higher ge, nd the incree in their proportion ill cue n incree in ~ 47 ~

3 herif Khlif & Evelin Mengov ubmitted on June 24, 215 the eighted verge ge of the lo-killed orker, nd ccordingly decree in the kill premium. Figure 1. Openne nd kill premium in developing countrie ~ 48 ~

4 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, 215 Conequently, in the outh, countrie tht re more (le kill bundnt, ill hve loer (higher cot of offhoring ervice for killed tk. The North offhore the high-killed tk to countrie tht re reltively more bundnt in high-killed orker, nd lo-killed tk to countrie tht re reltively more bundnt in lo-killed orker. A reult, countrie tht become the hot of lo-killed tk ill hve decree in the kill premium, hile thoe tht become the hot of the high-killed tk ill hve n incree in their kill premium, fter n improvement in the offhoring technology. Thi provide poible explntion to the ymmetric pttern of kill premi in the outh. Khlif nd Mengov (21 tet empiriclly the prediction of the model in thi pper utilizing the threhold etimtion technique developed in nen (1999. The reminder of the pper i orgnized follo: ection 2 include the literture revie, ection 3 preent the model, ection 4 include the concluion, ection 5 include the proof ppendice. Reference re included therefter. 2. iterture Revie The firt trem ttribute the incree in the kill premium in the outh to outourcing nd technology trnfer. For intnce, Feentr nd non (1996 rgue tht outourcing hift portion of input production from the North to the outh. Thi portion i the mot killed-intenive in the outh, nd the mot unkilled-intenive in the North. ence, outourcing incree reltive kill demnd nd ge inequlity in both countrie. imilrly, Zhu (24, nd Zhu nd Trefler (25 rgue tht if the North loe competitivene in unkilled-intenive product, proce of technology trnfer i induced, here the production of unkilled-intenive good i relocted to the outh. The relocted good re the mot killed-intenive by outhern tndrd. Thi outhern ctching-up rie the reltive demnd for killed orker nd thu excerbte ge inequlity. Yeple (23 demontrte tht in kill-crce lbor hot countrie, the flo of foreign direct invetment by U..-bed multintionl compnie re concentrted in lo-killed indutrie, here in kill-bundnt lbor hot countrie, the flo of foreign direct invetment re concentrted in high-killed indutrie. Thi cn cue the kill premium to decree in the former nd to incree in the ltter. Xu (23 ho tht in frmeork, here there re non-trded good hoe rnge i endogenouly determined by the level of trde brrier, triff reduction cue n expnion in the outh' import rnge, hich incree the demnd for killed orker in the North. Thi cue n incree in the North' killed lbor cot, hich led the outh to expnd it export rnge ell. The incree in the export rnge of both countrie led to n incree in kill demnd nd ge inequlity. In ddition, Beulieu, Benrroch, nd Giford (24 preent model in hich reduction of trde brrier ithin the high-tech ector cn rie the demnd for thee product in both countrie, incree the demnd for killed lbor, nd thu incree ge inequlity. Other tudie rgue tht trde induce kill-bied technologicl chnge. Acemoglu (22, 23 ho tht trde crete tendency for the reltive price of kill-intenive good to incree in the North. Thi mke the technologie ued in the production of thee good more profitble to develop nd encourge kill-bied technologicl chnge, hich contribute to the incree in ge inequlity. ince the outh imitte the Northern technologie tht re becoming more kill-bied, it experience n incree in the kill premium ell. Thoenig nd Verdier (23 rgue tht hen globliztion trigger n increed thret of technologicl lepfrogging, firm repond by biing the direction of their innovtion tord kill-intenive technologie. In model here only the North innovte nd the outh imitte, openne cue defenive kill-bied technicl chnge in the North, nd technicl upgrding in the production of the imitted good in the outh to more kill-intenive one. Thi generte n incree in ge inequlity in both the North nd the outh. ~ 49 ~

5 herif Khlif & Evelin Mengov ubmitted on June 24, 215 Neverthele, much thee tudie provide inight on the fctor generting n incree in the kill premium in both the North nd the outh, they do not ddre the ymmetry of the repone of the kill premium to trde openne mong developing countrie. The purpoe of thi pper i to provide n lterntive explntion for the ymmetric pttern of kill premi oberved, uing the theory of tk trde. In thi context, Gromn nd Roi-nberg (26, 28, & 212 rgue tht dvnce in communiction nd informtion technologie hve enbled the brek-up of the production proce into tk, here the performnce of thee tk i pred cro the orld. Antr, Gricno, nd Roi-nberg (26 invetigte the impct of offhoring in globl economy ith heterogeneou gent, here killed orker pecilize in problem olving, nd unkilled orker pecilize in production, nd find tht tem formtion cro countrie incree ge inequlity ithin unkilled orker in the outh, but not in the North. Therefore, interntionl trde i becoming le mtter of countrie' peciliztion in prticulr indutrie, nd more bout their peciliztion in prticulr tk. 3. Model Thi model build on the contribution of Gromn nd Roi-nberg (26, 28, & 212. In their pper, they focu on the impct of offhoring on ge in the North. oever, e extend their frmeork to conider the impct on ge inequlity in the outh. Our model preent to countrie: the North nd the outh. Firm in the to countrie produce lo-killed intenive good nd high-killed intenive good uing to fctor of production: lo-killed orker nd high-killed >, here i the orker. The North i more kill bundnt compred to the outh, or ( ( upply of high-killed orker in the North, hile i the upply of lo-killed orker in the North. imilrly, i the upply of high-killed orker in the outh, hile i the upply of lo-killed orker in the outh The North In the North, firm cn produce to good, X nd Y, ith contnt return to cle. The production of unit of either good involve continuum of tk nd continuum of tk. We normlize the meure of tk in ech indutry to one. The tk cn be performed by lo-killed orker only, nd the tk cn be performed by high-killed orker only. In ny indutry, the tk tht cn be performed by given fctor require imilr mount of tht fctor hen performed t home. Indutrie my differ in their fctor intenitie. If production technology llo no ubtitution beteen fctor or tk, ech tk mut be performed t fixed intenity in order to produce unit of output. In indutry X, firm need X unit of the lo-killed orker to perform typicl tk once, nd X unit of the high-killed orker to perform typicl tk once. ince the meure of tk nd tk i normlized to one, X i the totl mount of lo-killed orker nd X i the totl mount of high-killed orker, tht ould be needed to produce unit of good X in the bence of ny offhoring. In indutry Y, firm need Y unit of the lo-killed orker to perform typicl tk once, nd Y unit of the high-killed orker to perform typicl tk once. ince the meure of tk nd tk i normlized to one, Y i the totl mount of lo-killed orker nd Y i the totl mount of high-killed orker, tht ould be needed to produce unit of good Y in the bence of ny offhoring. We ill ume tht indutry X i more kill intenive compred to Y, hich men X Y >. X Y ~ 5 ~

6 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, 215 Firm cn undertke thee tk in the North, or offhore them to be performed in the outh. ince ome tk re more difficult to offhore thn other, e recognize the difference in term of input β t i requirement. A firm producing good j tht offhore the f - tk i brod require fj fj fj unit of lbor in the outh, fj ( X, X, Y, Y of offhoring. A decline in. β fj i prmeter tht reflect the technology β fj repreent the ee to offhore given tk brod, nd i equivlent tfj i i prmeter tht reflect improvement in the tfj i i continuouly to decree in the cot of offhoring. technology of offhoring tht differ cro the i tk. We ume tht β 1, fj differentible nd tht t ( i fj fj fj, nd t et nd be the ge of lo-killed orker in the North nd in the outh, repectively. et nd be the ge of high-killed orker in the North nd in the outh, repectively. We lo ume tht > β t (, > β t (, > β t ( nd > β t (, X X Y Y fj i >. X X Y Y uch tht it i profitble for the North to conduct ome tk in the outh. Thu, the Northern firm offhore tk in order to tke dvntge of the loer ge in the outh. In ech indutry, the mrginl tk performed in the North i determined by the condition tht the ving in the ge cot jut blnce the offhoring cot follo = βx X X (1 t I = βy Y Y (2 t I = βx X X (3 t I = βy Y Y (4 t I here I fj i the threhold tk, belo hich ll f tk in the production of good j re offhored to the outh, nd bove hich ll f tk re produced in the hedqurter in the North, hon in the folloing figure 2 nd 3. I X 1 Offhore to the outh edqurter in the North I X 1 Offhore to the outh edqurter in the North Figure 2. The threhold -tk nd -tk in the X-indutry in the North ~ 51 ~

7 herif Khlif & Evelin Mengov ubmitted on June 24, 215 I Y 1 Offhore to the outh edqurter in the North I Y 1 Offhore to the outh edqurter in the North Figure 3. The threhold -tk nd -tk in the Y-indutry in the North In competitive economy, the price of ny good i le thn or equl to the unit cot of production, ith equlity henever poitive quntity of the good i produced. The unit cot of good j i the um of the ge pid to the Northern lo-killed nd high-killed orker, nd the ge pid to the outhern lo-killed nd high-killed orker. Accordingly, the price of good X i given by I X (5 ( 1 β ( 1 β P = I + t i di + I + t i di X X X X X X X X X X X imilrly, the price of good Y i given by I Y (6 ( 1 β ( 1 β P = I + t i di + I + t i di Y Y Y Y Y Y Y Y Y Y Y here the firt term in both eqution i the lbor cot of the lo-killed orker performing tk in the hedqurter in the North, the econd term i the lbor cot of the lo-killed orker performing offhored tk in the outh, the third term i the lbor cot of the high-killed orker performing tk in the hedqurter in the North, nd finlly the fourth term i the lbor cot of the high-killed orker performing offhored tk in the outh. ubtituting (1 nd (3 into (5 yield here = 1 I + (4 into (6 yield here I X t X X X X t I = 1 I + I Y PX = X X + X X (7 i di Y Y Y t I t Y X, nd = 1 I + I X t X X X X t I i di X I X I Y. imilrly, ubtituting (2 nd PY = Y Y + Y Y (8 i di Y, nd = 1 I + The umption tht t ( i > for ll [,1] fj I Y t Y Y Y Y t I i di i implie tht ( I 1 Y. < for I >, hich men tht offhoring reduce the ge bill in proportion to the cot of performing the f tk t fj fj fj ~ 52 ~

8 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, 215 home, long ome tk re performed brod. The improvement in the offhoring technology of the f tk in indutry j i reflected in the decline of β fj, or d β fj <. Thi cue decline in the groth rte of fj, hich i referred to the productivity gin, it i reflected in boot to lbor productivity 1. According to Gromn nd Roi-nberg (28, firm' cot ving re proportionl to it pyment to orker. Thee ving re much the me ould reult from n economy-ide incree in lbor productivity. The boot in productivity rie firm' demnd for orker, hich tend to inflte their ge, much ould lbor-ugmenting technologicl progre. Therefore, the productivity gin ork to the benefit of the fctor hoe tk re being moved offhore. Next, e conider the fctor mrket in the North. The mrket for lo-killed nd high-killed lbor cler hen employment by the to indutrie in the tk performed in the North exhut the fctor upply. The lbor mrket clering condition in the North re given by ( 1 ( 1 ( 1 ( 1 I X + I Y = (9 X X Y Y I X + I Y = (1 X X Y Y here X nd Y denote the output of the to indutrie, repectively. The condition under hich the kill premium incree in the North repone to improvement in the offhoring technology i cptured in the folloing propoition. Propoition 1 N The kill premium in the North, ω =, incree ith n improvement in the technology of offhoring, hen d β fj <, fj, if nd only if ( 1 > θ X, nd the productivity gin in the tk in the high-killed intenive indutry i lrger thn tht in the lo-killed intenive indutry, nd if nd only if the productivity gin in the tk in the high-killed intenive indutry i lrger thn tht in the lo-killed intenive indutry. Proof included in ppendix 1. Thi propoition tte tht the improvement in the technology of offhoring the tk cue productivity gin tht ork to the benefit of the lo-killed orker in the North, nd tht the improvement in the technology of offhoring the tk cue productivity gin tht ork to the benefit of the high-killed orker in the North. oever, if the productivity gin in the high-killed intenive indutry i lrger thn in the lo-killed intenive indutry for ll f tk, then thee gin ork to the benefit of the high-killed orker reltively more thn to the benefit of the lo-killed orker, nd ccordingly the kill premium incree. The folloing propoition conider the condition under hich the kill premium incree in the North ith n improvement in the offhoring technology of the f tk. Propoition 2 N The kill premium in the North, ω, incree ith n improvement in the technology of offhoring tk, hen d β < only, nd decree ith n improvement in the technology of offhoring tk, hen d β < only. 1 The incluion of the price effect due to n improvement in the offhoring technology doe not chnge the qulittive reult of the nlyi. ~ 53 ~

9 herif Khlif & Evelin Mengov ubmitted on June 24, 215 Proof included in ppendix 2. Thi propoition tte tht the improvement in the technology of offhoring tk bring productivity gin tht ork to the benefit of the high-killed orker hoe tk re being moved offhore. Thi cue the ge of the high-killed to incree, nd ccordingly induce the kill premium to incree ell. Alterntively, the improvement in the technology of offhoring tk cue productivity gin tht ork to the benefit of the lo-killed orker hoe tk re being moved offhore. Thi cue the ge of the lo-killed to incree, nd ccordingly induce the kill premium to decree The outh We ume tht β t ( >, β t ( >, β t ( > nd β ( X X X X Y Y t >, hich Y Y gurntee tht the outh doe not offhore to the North, it ould be too expenive for the outh to py the Northern ge. Tking into conidertion the offhoring deciion mde by firm in the North, the number of the outhern lo-killed orker engged in locl production in the outh,, i given by IX IY = βx tx ( i X di + βy ty ( i Y di (11 imilrly, the number of the outhern high-killed orker engged in locl production in the outh,, i given by IX IY = βx tx ( i X di + βy ty ( i Y di (12 i the number of outhern lo-killed orker performing the offhored tk here ( for Northern firm, nd ( i the number of outhern high-killed orker performing the offhored tk for Northern firm. The folloing figure 4 nd 5 ho the diviion of lo-killed nd high-killed lbor in the outh beteen thoe engged in locl production in outhern firm, nd thoe performing offhored tk for Northern firm. ocl production l* Offhored -tk * l* *-l* Figure 4. Diviion of lo-killed lbor in the outh beteen engging in locl production in the outh, nd ( performing offhored -tk for Northern firm ocl production h* Offhored -tk * Figure 5. Diviion of high-killed lbor in the outh beteen engging in locl performing o ff hored -tk for Northern firm production in the outh, nd h* *-h* ~ 54 ~

10 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, 215 A in Gromn nd Roi-nberg (212, firm in the outh mut py mll extr cot to cquire the cpbility to erve n externl provider of tk. In equilibrium, no firm h n incentive to py thi cot. oever, e ume tht firm in the North re illing to cover thi cot long their totl cot of procuring the tk from the outh i le thn their totl cot of producing it in their hedqurter in the North. Thi provide n incentive for firm in the outh to perform offhoring ervice to Northern firm. If thi pyment i reflected in n incree in the ge of the orker ho re producing thee tk in the outh on behlf of the firm in the North, then e hve n incentive for orker in the outh to upply their lbor to outhern firm providing offhoring ervice. Aume the ge of the lo-killed orker hired to perform offhored tk in thee firm i, hile tht of the remining lo-killed orker engged in locl production in the outh i, here by > 2, then the eighted verge ge of the lo-killed orker,, i given ( + = = + 1 imilrly, ume the ge of the high-killed orker hired to perform offhored tk in thee firm 3 i, hile tht of the remining high-killed orker engged in locl production i, here >, then the eighted verge ge of the high-killed orker,, i given by + ( = (14 = + 1 In thi context, the kill premium in the outh i given by Propoition 3 threhold kill bundnce in the outh, ( + + ω = = T (13 (15, belo hich n improvement in the technology of 2 The umption tht the ge of thoe employed in firm engged in offhoring re higher thn the ge of thoe orking in locl firm i jutified by the empiricl evidence hon in Aitken et l. (1996 tht outhern orker employed in multintionl corportion ern higher ge on verge compred to orker employed by dometic firm. Thi umption i lo bed on the finding in ethupthy (213 ho ho tht folloing ne offhoring opportunity, offhoring firm incree their productivity nd profitbility t the expene of non-offhoring firm. Thi chnnel led to higher dometic ge t offhoring firm nd loer dometic ge t non-offhoring firm. 3 Developed countrie offhore tk to developing countrie, to tke dvntge of reltively loer ge of the high-killed orker. Due to cpitl-kill complementrity, the productivity of high-killed orker i higher in developed countrie tht re reltively more cpitl-bundnt. Thu, the ge of high-killed orker re higher in developed countrie. ~ 55 ~

11 herif Khlif & Evelin Mengov ubmitted on June 24, 215 offhoring ( d β < cue decree in the kill premium in the outh, nd bove hich the improvement in the technology of offhoring ( d β < cue n incree in the kill premium in the outh. Proof included in ppendix 3. Thi reult provide poible explntion for the ymmetric pttern of kill premi fter trde openne mong developing countrie. The threhold kill bundnce i diplyed in the folloing figure 6. Figure 6. Threhold kill bundnce in the outh The intuition for the exitence of thi threhold i trightforrd. Developed countrie offhore their tk to developing countrie tht re high-killed bundnt to benefit from the reltively loer lbor cot. Thi men tht more high-killed orker in the outh ill be involved in performing offhored tk for firm in the North. A their ge i higher thn the ge of the remining high-killed orker in the outh, the incree in the proportion of the high-killed orker performing offhored tk led to n incree in their eighted verge ge, nd ccordingly n incree in the kill premium. On the other hnd, developed countrie offhore their tk to developing countrie tht re lo-killed bundnt to benefit from the reltively loer lbor cot. Thi men tht more lo-killed orker in the outh ill be involved in performing offhored tk for firm in the North. A their ge i higher thn the ge of the remining lo-killed orker in the outh, the incree in the proportion of the lo-killed orker performing offhored tk led to n incree in their eighted verge ge, nd ccordingly decree in the kill premium. Propoition 4 1 threhold kill bundnce TX, belo hich the kill premium in the outh decree ith n improvement in the technology of offhoring ll tk in the high-killed intenive X indutry, hen d β X <, nd bove hich the kill premium incree in the outh. ( 2 nother threhold kill bundnce TY, belo hich the kill premium in the outh decree ith n improvement in the technology of offhoring ll tk in the lo-killed intenive Y indutry, hen d β Y <, nd bove hich the kill premium incree in the outh. ( 3 We hve TX ( ( TY >. Proof included in ppendix 4. Thi reult i intuitive ell. An improvement in the offhoring technology of the high-killed intenive X indutry, led the North to offhore more tk to produce good X to the developing countrie tht re reltively high-killed bundnt, nd offhore more tk to ~ 56 ~

12 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, 215 produce good X to the developing countrie tht re reltively lo-killed bundnt. Therefore, the reltive incree in the demnd for high-killed orker in the former ill cue n incree in the kill premium, hile the reltive incree in the demnd for lo-killed orker in the ltter ill cue decree in the kill premium. The me cenrio tke plce ith n improvement in the offhoring technology of ll tk in the lo-killed intenive Y indutry. oever, the threhold in the lt ce i mller thn in the firt ce. Thi i becue the incree in the proportion of the high-killed orker performing offhored tk in the Y indutry reltive to the incree in the proportion of the lo-killed orker performing offhored tk in the Y indutry i mller thn tht in the X indutry. Thi follo from the umption tht the X indutry i more kill intenive thn the Y indutry, nd tht the reltive lbor requirement of high-killed orker performing offhored tk to tht of the lo-killed orker performing offhored tk in the Y indutry, I Y I Y t t Y Y i di i di, i le thn tht in the X indutry, I X I X t t X X i di i di. Thi men tht developing countrie hoe kill bundnce i loer thn the threhold (, ill experience decline in the kill premium fter n improvement in the technology of offhoring ll tk in the X indutry, hile thoe bove the threhold TX ill experience n incree in the kill premium. imilrly, developing countrie hoe kill bundnce i loer thn the threhold TY, ill experience decree in the kill premium fter n improvement in the technology of offhoring ll tk in the Y indutry, hile thoe bove the threhold TY ill experience n incree in the kill premium. Thi lo men tht developing countrie hoe kill bundnce i beteen TX nd TY ill experience decree in the kill premium fter n improvement in the offhoring technology of ll tk in the X indutry, but ill experience n incree in the kill premium fter n improvement in the offhoring technology of ll tk in the Y indutry, hon in the folloing figure 7. TX Figure 7. Threhold kill bundnce in the outh ith n improvement in the technology of o ff horing tk in the X indutry nd the Y indutry Thi i becue the Y indutry h loer reltive high-killed to lo-killed lbor requirement for offhoring oppoed to the X indutry. Therefore, countrie ith reltively loer kill bundnce cn ttrct more tk ith n improvement in the offhoring of ll tk ~ 57 ~

13 herif Khlif & Evelin Mengov ubmitted on June 24, 215 in the Y indutry thn ith n improvement in the offhoring of ll tk in the X indutry. Thi explin the mller threhold in the ce of n improvement in the technology of offhoring tk in the lo-killed intenive indutry compred to the ce of n improvement in the technology of offhoring tk in the high-killed intenive indutry. Propoition 5 The kill premium in the outh, -tk, ( j offhoring -tk, ( j ω, incree ith n improvement in the technology of offhoring d β < for one or ll j, nd decree ith n improvement in the technology of d β < for one or ll j. Proof included in ppendix 5. The intuition i trightforrd. If the technology of offhoring tk in either the high-killed intenive or the lo-killed intenive ector, or both, improve, there re more tk offhored to the outh by Northern firm. Thu, there re more high-killed orker in the outh involved in performing tk for Northern firm. Accordingly, the eighted verge ge of the high-killed incree, hile tht of the lo-killed doe not chnge, leding to n incree in the kill premium. Alterntively, if the technology of offhoring tk in either the high-killed intenive or the lo-killed intenive ector, or both, improve, there re more tk offhored to the outh by Northern firm. Thu, there re more lo-killed orker in the outh involved in performing tk for Northern firm. Accordingly, the eighted verge ge of the lo-killed incree, hile tht of the high-killed doe not chnge, leding to decree in the kill premium. 4. Concluion The 2x2x2 eckcher-ohlin model predict tht trde openne induce countrie to export the good tht intenively ue the reltively bundnt fctor of production, nd import the good tht intenively ue the reltively crce fctor of production. Accordingly, kill bundnt developed countrie re expected to export the good tht intenively ue high-killed orker. Thi led to n incree in the reltive price of the high-killed intenive good, rie in the reltive demnd for high-killed orker, nd conequently n incree in the kill premium. On the other hnd, kill crce developing countrie re expected to export the good tht intenively ue lo-killed orker. Thi led to n incree in the reltive price of the lo-killed intenive good, rie in the reltive demnd for lo-killed orker, nd conequently decree in the kill premium. Empiricl evidence, hoever, demontrte tht lthough ome developing countrie hve itneed declining kill premium, other hve experienced idening ge gp fter trde liberliztion. Thi pper develop model of trding tk beteen to countrie: the North nd the outh. The North i more kill-bundnt compred to the outh. Firm produce lo-killed intenive good nd high-killed intenive good. There re to fctor of production: lo-killed orker nd high-killed orker. The production of unit of either good involve continuum of tk nd continuum of tk. The tk cn be performed by lo-killed orker only, nd the tk cn be performed by high-killed orker only. The reult ugget tht the kill premium in the North incree ith n improvement in the technology of offhoring, under certin condition. On the other hnd, the North offhore the high-killed tk to countrie tht re reltively more bundnt in high-killed orker, nd lo-killed tk to countrie tht re reltively more bundnt in lo-killed orker. A reult, countrie tht become the hot of lo-killed tk ill hve decree in the kill premium, hile thoe tht become the hot of the high-killed tk ill hve n incree in their kill premium, fter n improvement in the offhoring technology. Thi provide poible explntion to the ymmetric ~ 58 ~

14 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, 215 pttern of kill premi in the outh. Acknoledgement We thnk prticipnt in the Mid-Wet Economic Aocition Annul Conference. Reference [1] Acemoglu, D. (22. Directed technicl chnge. Revie of Economic tudie, 69(4, [2] Acemoglu, D. (23. Pttern of kill premi. Revie of Economic tudie, 7(2, [3] Aitken, B., rrion, A., & ipey, R. E. (1996. Wge nd foreign onerhip: A comprtive tudy of Mexico, Venezuel, nd the United tte. Journl of Interntionl Economic, 4(3-4, [4] Antr, P., Gricno,., & Roi-nberg, E. (26. Offhoring in knoledge economy. The Qurterly Journl of Economic, 121(1, [5] Beulieu, E., Benrroch, M., & Giford, J. (24. Trde brrier nd ge inequlity in north-outh model ith technology-driven intr-indutry trde. Journl of Development Economic, 75(1, [6] Feentr, R. C., & non, G.. (1996. Foreign invetment, outourcing nd reltive ge. In R. C. Feentr, G. M. Gromn, & D. A. Irin (Ed., The politicl economy of trde policy: Pper in honor of Jgdih Bhghti (pp Cmbridge, MA.: MIT Pre. [7] Freemn, R. B., & Ootendorp, R.. (21. Wge round the orld: Py cro occuption nd countrie (Working Pper No Ntionl Bureu of Economic Reerch. Retrieved from [8] Goldberg, P. K., & Pvcnik, N. (24. Trde, inequlity nd poverty: Wht do e kno? Evidence from recent trde liberliztion epiode in developing countrie (Working Pper No Ntionl Bureu of Economic Reerch Retrieved from [9] Gromn, G. M., & Roi-nberg, E. (26. The rie of offhoring: It' not ine for cloth nymore. Pper preented t the Federl Reerve Bnk of Kn City on The Ne Economic Geogrphy: Effect nd Policy Impliction Jckon ole ympoium. Retrieved from [1] Gromn, G. M., & Roi-nberg, E. (28. Trding tk: A imple theory of offhoring. Americn Economic Revie, 98(5, [11] Gromn, G. M., & Roi-nberg, E. (212. Tk trde beteen imilr countrie. Econometric, 8(2, [12] nen, B. E. (1999. Threhold effect in non-dynmic pnel: etimtion, teting, nd inference. Journl of Econometric, 93(2, [13] non, G.., & rrion, A. (1995. Trde, technology nd ge inequlity (Working Pper No Ntionl Bureu of Economic Reerch. Retrieved from [14] Khlif,., & Mengov, E. (21. Offhoring nd ge inequlity in developing countrie. Journl of Economic Development, 35(3, [15] Robbin, D. J. (1996. Evidence on trde nd ge in the developing orld (Working Pper No OECD Development Centre. ~ 59 ~

15 herif Khlif & Evelin Mengov ubmitted on June 24, 215 [16] ethupthy, G. (213. Offhoring, Wge, nd Employment: Theory nd Evidence. Europen Economic Revie, 62, [17] Thoenig, M., & Verdier, T. (23. A theory of defenive kill-bied innovtion nd globliztion. Americn Economic Revie, 93(3, [18] Wood, A. (1997. Openne nd Wge Inequlity in Developing Countrie: The tin Americn Chllenge to Et Ain Conventionl Widom. The World Bnk Economic Revie, 11(1, [19] Xu, B. (23. Trde iberliztion, Wge Inequlity nd Endogenouly Determined Nontrded Good. Journl of Interntionl Economic, 6(2, [2] Yeple,. (23. The role of kill endoment in the tructure of U.. outrd foreign direct invetment. Revie of Economic nd ttitic, 85(3, [21] Zhu,. C. (24. Trde, product cycle nd inequlity ithin nd beteen countrie. Cndin Journl of Economic, 37(4, [22] Zhu,. C., & Trefler, D. (25. Trde nd inequlity in developing countrie: A generl equilibrium nlyi. Journl of Interntionl Economic, 65(1, Appendix 1. Proof of Propoition 1 Eqution (7 nd (8 cn be reritten : 1 = X X X X P Y Y Y Y = here e normlize P X = 1, nd P = PY P X. olving the firt eqution for yield = 1 X X ubtitute thi into the econd eqution to get 1 X X P Y Y Y Y = X X Thi cn be rerrnged to Thi cn be reritten Tking the totl differentil yield X Y Y X X Y Y P Y Y + = X X X X X X X Y Y Y Y Y Y = P X X X X ~ 6 ~

16 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, 215 d d d d X X Y Y X X Y Y Y + Y Y Y X X X X d + ( d X Y Y X X Y Y 2 X X X X X X = + ( Y Y Y 2 d Y X d X X X X implifying yield d ( Y Y X X Y Y X X = ( d + d X Y Y Y Y X X X X X Y Y + dy X X X X + d Y Y 2 X X Y Y 2 X X X X X ubtituting θ fj = fj fj the cot hre of the f tk in indutry j, e hve θ θ θ d θ ( d d X Y X Y Y = Y Y + X θx θx θx Y Y + dy θx θx θy 1 θxθy 1 + dx θx X θx X Divide both ide by to get d θ θ θ θ X Y X Y Y = Y d Y + dx θx θx θx Y Y + dy θx θx θy 1 θxθy 1 + dx θx X θx X Thi cn be implified further to ~ 61 ~

17 herif Khlif & Evelin Mengov ubmitted on June 24, 215 d θ Which cn be rerrnged to θ θ θ X Y Y X Y X Y = Y d Y + dx θx Y θx X d θ Y Thi cn be further rerrnged to d θx Y Y Y + dy θx θx Y θy 1 θxθy 1 + dx θx X θx X θ θ d θ θ d = + X Y Y X Y X θy θx Y θx X θ θ θ d + θ θ X Y Y Y X X Y θ θ θ d + θ θ Y X Y X X X X θ θ θ θ d θ θ d Y X X Y Y X Y X = θy + θx Y θx X θ θ θ d + θ X θ θ θ d + θ X X Y Y Y Y Y X Y X X olving for the percentge chnge in, d, yield d Thi cn be further implified to here z = dz z θ θ d θ θ d = + θ θ θ θ θ θ θ θ Y X Y X Y X Y X X Y Y Y X X Y X θ θ θ 1 d + θ θ θ θ X Y Y Y Y X X Y Y θ θ θ 1 d + θ θ θ θ Y X Y X Y X X Y X ( Y ( X θyθx θxθ Y = θyθx θxθy + ( θ θ θ Y X Y ~ 62 ~ ( Y ( X ( θ θ θ θ Y X X Y denote the groth rte of vrible z. Thi cn be implified to

18 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, 215 Thi cn be implified further to θyθx ( Y θy ( θ X X = θyθx θ Y θx ( θ Y θx θ Y ( Y ( X + ( θ θ θ θ Y X X Y θx θy ( Y ( θx θ X Y = θx θy θx θy ( θ Y θx θ Y ( Y ( X + ( θ θ θ θ Y X X Y ince e umed tht indutry X i reltively more high-killed intenive compred to indutry θx θy Y, then e hve ( θ ( θ X >. Any improvement in offhoring i reflected in decline in β fj, uch Y tht d β fj <, fj. In thi context, d β fj h n impct on fj fj, ince < dβ, the loer the cot of offhoring, the broder the rnge of tk to be offhored. We lo hve d di fj fj I fj t fj i di = tfj ( i < tfj ( I fj 2 d d di dβ di dβ fj fj fj. Therefore, fj fj fj = >, hich give u the productivity effect in Gromn nd Roi-nberg (28. Thi men tht > if both the firt term nd the econd term re poitive, hen d β fj <, nd fj <, fj. The firt term i poitive if nd only if the productivity gin in the tk in the lo-killed intenive indutry i lrger thn tht in θ the high-killed intenive indutry, or X θy ( Y > ( X, ince > θ ( θ by umption. On the θx θy other hnd, e kno tht the denomintor i poitive in the econd term ( θ ( θ ( θ 1 X X di Y fj X >. Then if >, the econd term i poitive if nd only if the productivity gin in the tk in the lo-killed intenive indutry i lrger thn tht in the high-killed intenive indutry, or >. In ummry, the ge of the lo-killed orker in the North incree if the ( Y ( X productivity gin for both type of tk i lrger in the lo-killed intenive indutry compred to the high-killed intenive indutry. To olve for the percentge chnge in the ge of the high-killed orker in the North,, e hve Thi cn be reritten Tking the totl differentil yield = 1 X X X X = 1 X X X X Y ~ 63 ~

19 herif Khlif & Evelin Mengov ubmitted on June 24, 215 Thi cn be rerrnged to X X d + X d X = X X d X d X θ Divide both ide by 1 to get Thi cn be reritten olving for yield d + d = θ d d X X X X X X θ X d θ X d X X X X d X d = X X X θ X X X X = θ θ θ X θ X θx = X θx θx X X Therefore, ince the kill premium in the North i given by premium i given by ubtituting nd N ω = N into ω yield, the percentge chnge in the kill ω θ 1 θ = X θ + X θx N X X θx = + 1 θ X θx θy ( ( θ X θy θx θy ( θ ( θ X θ X X θ X Y X ( θ θ θ Y X Y X Y X + ( Y ( X ( θ θ θ θ Y X X Y Thi men tht N ω > if both the firt term nd the econd term of re negtive hen d β <, nd fj < fj. The firt term i negtive if nd only if the productivity gin in the fj tk in the high killed-intenive indutry i lrger thn tht in the lo-killed intenive indutry, or X > Y. On the other hnd, if ( θ θ θ >, hich i the equivlent of Y X Y 1 > θ X, the econd term i negtive if nd only if the productivity gin in the tk in the high-killed intenive indutry i lrger thn tht in the lo-killed intenive indutry, or >. ( X ( Y ~ 64 ~

20 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, Proof of Propoition 2 Aume tht βx = βy = β, nd β X = β Y = β. In thi ce, the price of good X nd Y re given by 1 = X + X P = Y + Y here = 1 I + I t I t i di, nd = 1 I + I t t I i di. olving the firt eqution for yield = 1 X X ubtituting into the econd eqution give Thi cn be implified further to = P Y ( X Y X Y X = P Y X Y Y X X Tking the totl differentil yield Y X Y X Y d + Y d d d = X X Thi cn be rerrnged to Y X Y X d Y = d Y X X Divide both ide by 1 to get Thi yield We lo hve 1 X X d Y X d Y X Y = Y X X = =, hich fter replcing cn be reritten ~ 65 ~

21 herif Khlif & Evelin Mengov ubmitted on June 24, 215 Y X Y X X Y ( X Y X X Y P ( X Y X 1 P = Y 1 P = Y 1 = 1 X X X X X X X X X Y Thi cn be reritten = 1 P Y ( X Y X ( X X Y X Tking the totl differentil yield X d + X d = Dividing both ide by 1 nd rerrnging yield = The kill premium in the North i thu given by N ω = = ( Therefore, n improvement in the offhoring of the tk only, hen d β <, ould ffect poitively the productivity of the high-killed orker, reflected in n incree in, nd ( therefore cue n incree the kill premium in the North, N ω. On the other hnd, n improvement in the offhoring of the tk only, hen d β <, ould ffect poitively the productivity of the lo-killed orker, reflected in n incree in, nd therefore cue decree in the kill premium in the North, N ω. ( 3. Proof of Propoition 3 The kill premium in the outh i given by ω + + Aume tht βx = βy = βx = βy = β. Tking the derivtive of = ~ 66 ~ ω ith repect to β yield

22 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, ( 1 = ω ω If β the outh decline. Thi derivtive i poitive if nd only if >, thi men tht the offhoring technology improve ( d β < hich cn be implified to hich cn be rerrnged to + ( > > + ω Thi lo men tht β < if nd only if 1 1 > ω < ω The left-hnd ide of (9 i independent of ( of the kill bundnce in the outh ( right-hnd ide ith repect to (, the kill premium in. On the other hnd, the right-hnd ide i function. It remin to determine the ign of the derivtive of the. Firt, the kill premium in the outh cn be reritten ~ 67 ~

23 herif Khlif & Evelin Mengov ubmitted on June 24, 215 ( ( ( + ω = + 1 Thu, the derivtive of the kill premium ith repect to kill bundnce ( 2 1 ( + ( ~ 68 ~ i given by ω = + ( + + Thi i poitive if nd only if Thi cn be implified to Which cn be further implified to ( + ( > ( + + hich i true ince e umed 1 2 > + > >. Therefore, the kill premium incree ith kill bundnce. In ddition, e lo hve <, nd <, becue the improvement in offhoring technology incree offhoring to the outh, nd ccordingly incree the proportion of the lo-killed nd the high-killed orker in the outh performing tk for Northern firm. Thi men tht the right-hnd ide of (9 i increing in ( independent of (, there exit threhold, T = ω. Therefore, ince the left-hnd ide i, tht tifie Belo thi threhold, kill bundnce i loer thn the threhold, nd ccordingly the right-hnd ide ω i loer thn the left-hnd ide, nd the condition (9 i tified, uch tht β >, nd n improvement in the offhoring technology cue decree in the kill premium. Above the threhold, kill bundnce i higher thn the threhold nd ccordingly the right-hnd ide i higher

24 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, 215 ω thn the left-hnd ide, nd the condition (1 i tified, uch tht β <, nd n improvement in the offhoring technology cue n incree in the kill premium. 4. Proof of Propoition 4 The kill premium in the outh i given by ω = + + Aume tht βx = βx = βx, nd βy = βy = βy. The derivtive of ω ith repect to β X i given by + ( 1 ω = X X X + ω If >, thi men tht the offhoring technology of the high-killed intenive indutry β X improve ( d β <, the kill premium in the outh decline. Thi derivtive i poitive if nd only if hich cn be implified to X + ( 1 ( 1 X > 2 X + I X t X X i di X > ω = ω I X X tx ( i di X A in propoition 3, thi implie tht there i threhold kill bundnce (, belo hich the kill premium in the outh decline ith n improvement in the technology of offhoring ll tk in the high-killed intenive indutry, nd bove hich the kill premium incree. imilrly, the derivtive of ω ith repect to β Y i given by TX ~ 69 ~

25 herif Khlif & Evelin Mengov ubmitted on June 24, ( 1 ω = Y Y Y + ω If βy >, thi men tht the offhoring technology of the lo-killed intenive indutry improve ( d β <, the kill premium in the outh decline. Thi derivtive i poitive if nd only if hich cn be implified to Y + ( 1 ( 1 ( 1 Y > 2 Y + I Y t Y Y i di Y > ω = ω I Y Y ty ( i di Y A in propoition 3, thi implie tht there i threhold kill bundnce (, belo hich the kill premium in the outh decline ith n improvement in the technology of offhoring ll tk in the high-killed intenive indutry, nd bove hich the kill premium incree. We umed tht X X >, nd tht Y Y IX X IY IX IY X Y Y t i di t i di < t i di t i di TY, hich men tht the gp beteen the lbor requirement for ll tk nd ll tk in the high-killed intenive indutry i higher thn tht in the lo-killed intenive indutry. Thi men tht the econd term in the right-hnd ide in (11 i mller thn tht in the right-hnd ide in (12. Thi lo men tht the TX TY > ω, ince >. equlitie tht determine the to threhold imply tht ( ( 5. Proof of Propoition 5 The kill premium in the outh i given by ( ( + 1 ω = + ( ~ 7 ~

26 .todycience.org/jfe Journl of Finnce nd Economic Vol. 3, Iue 3, 215 Aume tht βx = βy = β, nd β X = β Y = β. Thi men tht the number of outhern lo-killed orker performing offhored tk for Northern firm i given by I I = βt ( i X di + βt ( i Y di imilrly, the number of outhern high-killed orker performing offhored tk for Northern firm i given by I I = β t ( i X di + β t ( i Y di Tking the derivtive of the kill premium ith repect to β yield ω = < ( 1 β + 1 Thi derivtive i negtive becue <. Accordingly, β decline, reflecting n improvement in the technology of offhoring tk, the kill premium incree. On the other hnd, tking the derivtive of the kill premium ith repect to β yield ( ω 1 = > 2 + Thi derivtive i poitive becue <. Accordingly, β decline reflecting n improvement in the technology of offhoring technology of tk, the kill premium decree. Copyright Copyright for thi rticle i retined by the uthor(, ith firt publiction right grnted to the journl. Thi i n open-cce rticle ditributed under the term nd condition of the Cretive Common Attribution 4. Interntionl icene. ~ 71 ~