Offshoring, matching, and income inequality

Abstract

This paper develops a matching framework of offshoring in which offshoring is defined as cross-country matching between workers and managers with complementary production technology. We study the distributional effects of offshoring by embedding the matching framework in a two-country, two-task model in which workers and managers possess a continuum of skills. Offshoring alters the matching mechanism, changes the span of control, and thereby influences inequality through differential distributional impacts between-task and within-task in each country. We then introduce an endogenous task choice into the model and show that offshoring changes the occupational choice mechanism, which feeds through into distributional consequences. In one case with an endogenous task choice, offshoring leads all workers to match with better managers, thereby increasing within-worker inequality in both countries. This outcome provides new insight into the distributional consequences of offshoring.