The Elasticity of Substitution and the Sector Bias of International Outsourcing

Abstract EN

Considering a possible sector bias of international outsourcing within a 2×2 framework, four different scenarios appear.

The relative high or the relative low-skill intensive industry can relocate either its high or its low-skill intensive production fragment.

Traditionally, depending on the superiority of either the wage or the outsourcing effect, general equilibrium effects are regarded as ambiguous in two of the four scenarios.

In this contribution, I provide a formal approach and a calibration exercise for the German economy.

Results show that a focus on the elasticity of substitution can complete the picture.

When the elasticity exceeds a critical value, results are unambiguous in all four scenarios, supporting the existence of the sector bias of international outsourcing.