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Federal Reserve Bank of Atlanta
FRB Atlanta Working Paper
Offshoring, low-skilled immigration, and labor market polarization
Federico S. Mandelman
Andrei Zlate

During the last three decades, jobs in the middle of the skill distribution disappeared, and employment expanded for high- and low-skill occupations. Real wages did not follow the same pattern. Although earnings for the high-skill occupations increased robustly, wages for both low- and middle-skill workers remained subdued. We attribute this outcome to the rise in offshoring and low-skilled immigration, and we develop a three-country stochastic growth model to rationalize this outcome. In the model, the increase in offshoring negatively affects the middle-skill occupations but benefits the high-skill ones, which in turn boosts aggregate productivity. As the income of high-skill occupations rises, so does the demand for services provided by low-skill workers. However, low-skill wages remain depressed as a result of the surge in unskilled immigration. Native workers react to immigration by upgrading the skill content of their labor tasks as they invest in training.

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Federico S. Mandelman & Andrei Zlate, Offshoring, low-skilled immigration, and labor market polarization, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper 2014-28, 01 Dec 2014.
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Keywords: labor market polarization; task upgrading; offshoring; labor migration; heterogeneous agents; international business cycles
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