Question 4

Offshoring influences the relative demand for skilled labor in both the Home country, as well as in the Foreign country to which a portion of the manufacturing process is being offshored. Below, you are provided the relative demand and supply for skilled labor in the Home country prior to any offshoring.

Part (i): Suppose that the Home country does not engage in offshoring. If low skilled labor currently earns $1,500 per week, how much does skilled labor earn each week.

Part (ii): Suppose that the Home country engages in offshoring, and that the relative demand for skilled labor shifts 0.5 units rightward. Identify the new skill premium.

Part (iii): Suppose that the Home country engages in offshoring, and that the relative demand for skilled labor shifts 0.5 units rightward. Assuming that low skilled labor still earns $1,500 per week, how much does skilled labor earn each week after offshoring begins.

Part (iv): The relative demand for skilled labor in the Foreign country will also be affected by offshoring. In which direction will the relative demand for skilled labor in the Foreign country shift? Why?

Part (v): Explain the difference between offshoring and outsourcing. Would you expect outsourcing to have similar effects on the relative demands for skilled labor in the Home and Foreign countries? Why?