Instituto de Economía

Abstract: During the past three decades, U.S. employment has increased for high- and low-skill occupations, but declined for middle-skill ones. Wages have behaved differently, rising in high-skill occupations but remaining subdued for low- and middle-skill workers. We develop a three-country stochastic growth model to rationalize the contributions of offshoring and low-skilled immigration to this polarization of the labor market. Consistent with the evidence, offshoring negatively affects middle-skill occupations but brings cost savings that benefit employment in high-skill occupations. Since the low-skilled native workers are employed in non-tradable service occupations, they are sheltered from offshoring but are exposed to low-skilled immigration that depresses their wages. In response to immigration, natives invest in training. The model is estimated with international macroeconomic indicators, U.S. employment by skill group, and border patrol enforcement at the U.S.-Mexico border. Notwithstanding their asymmetric effect across skill groups, offshoring and low-skilled immigration are welfare-improving for the U.S. economy.