What Explains the Widening Wage Gap? Outsourcing vs. Technology

Abstract

The relative rise of wages for high-skilled workers over the last three decades has been the subject of intense academic and popular scrutiny. This paper develops a new methodology for decomposing wage changes into three sources: outsourcing, biased technological change, and total biased technological change. We find that for the 1980-1999 period the change in outsourcing accounts for between 28 and 36 percent of the observed wage change, and biased technological change for another 15-19 percent in the US. Jointly these two forces (total biased technological change) explain 58 percent of the wage change. In sum, we find that outsourcing and biased technological change can account for a large share of the observed divergence in the skilled wage premium.