The Globalization of Production.

• Author: Hanson, Gordon H.

Gordon H. Hanson [*]

Globalization is transforming the ways in which nations interact. National economies become integrated as the flow of goods and capital across borders expands. In standard theoretical models, a fall in trade barriers or transport cost triggers an increase in trade between producers in one country and consumers in another country. Part of what globalization entails is greater international trade in final goods, but that is by no means the whole story. In the current environment, firms are more able to fragment their operations internationally, locating each stage of production in the country where it can be done at the least cost, and transmitting ideas for new products and new ways of making products around the globe.

My research examines how these new aspects of globalization affect labor markets, industry structure, and industry location in national and regional economies. When U.S. firms fragment production internationally, they typically move less skill-intensive activities abroad and keep more skill-intensive activities at home. Foreign outsourcing of this type can change the demand for skilled and unskilled labor and alter the structure of wages both at home and abroad. In addition, when outsourcing occurs between neighboring countries, such as the United States and Mexico or Hong Kong and China, the globalization of production raises the incentive to produce in regions with relatively low-cost access to foreign markets. Thus, it may alter the location of economic activity inside countries.

International Trade, Foreign Outsourcing, and Wage Inequality

Globalization has attracted a great deal of academic attention in part because it has coincided with dramatic changes in the structure of wages in advanced countries. [1] Since the late 1970s, the real wages of more-skilled workers in the United States have risen steadily, while those of less-skilled workers have stagnated or even fallen. [2] More trade with low-wage countries is one possible factor behind rising wage inequality. What complicates identifying the impact of trade on wages is that other profound shocks to labor markets have occurred at the same time. The advent of information technology, for instance, appears to have increased the demand for skilled labor and allowed firms to eliminate many jobs performed by the less skilled. [3] In the absence of clear evidence linking trade and wages, many have attributed the rise in the skilled wage gap to technological change.

Naturally, we would like to have an empirical framework that allows us to estimate the impact of trade and technology shocks on labor demand and wages at the same time. This is particularly important where international trade takes the form of foreign outsourcing, since moving less-skill intensive production activities abroad makes production at home more skill-intensive. This may be observationally equivalent to changes in technology that are biased in favor of skilled labor. A large fraction of the growth in world trade since the 1970s has taken the form of trade in intermediate inputs, in general, and foreign outsourcing, in particular. [4] To cite some well-known examples, Nike outsources production of its footwear to firms in Asia, and Dell outsources production of the components and peripheral devices that make up its personal computers to suppliers around the world.

One surprising consequence of foreign outsourcing is that it can increase the demand for skilled labor both at home and abroad. Suppose firms in the skill-abundant United States use firms in non-skill-abundant Mexico to produce intermediate inputs. [5] We imagine that production involves many stages, such as design, parts production, and assembly, each of which differs in terms of how much skilled labor is required. Assuming wages differ between the two nations, we expect the United States to specialize in high-skill tasks and Mexico to specialize in low-skill tasks. If...