Question

Trade in Tasks and the Grossman and Rossi-Hansberg (2008)
model
Grossman and Rossi-Hansberg (2008) present a simple extension to the Heckscher-Ohlin-
Samuelson model which allows firms to relocate the low-skilled labor-intensive parts of the
production process to a low-wage country. In other words, they present a simple model of
offshoring, intermediate input trade, or global value chains (GVCs). Besides the mathemat-
ical model, the authors also introduce the concept of trade in tasks, as they view production
as a chain of several tasks which have to be performed to arrive at the final product. In
this view, the low-skilled labor-intensive tasks of production are moved to the cheap offshore
destination country, whereas the high-skill intensive tasks remain onshore, i.e., in the high
wage country.

(f) What is the impact of a fall in the general, task-unspecific  cost of offshoring on the (real)
wage of low-skilled workers? For this, you may focus on the small open economy case.

References
Grossman, G. M., and E. Rossi-Hansberg (2008): \Trading Tasks: A Simple Theory
of Offshoring," American Economic Review, 98(5), 1978{97.

Answer 1

As the cost on general, task-unspecific cost of offshoring decrease, the real wage of low skilled labor would decrease. As explained by Grossman, G. M., and E. Rossi-Hansberg (2008), Wage effects of offshoring. Wages are affected by offshoring due to three factors: technological advancements (Productivity effect), relative price effect and labor supply effect. Considering technology and labor supply remains constant, when cost of offshoring falls, the general, task-unspecific tasks shift to offshore, broadening the offshore tasks. This reduces the cost of labour intensive tasks for the firms. The effect is more on labour intesive firms compared to skill intensive firms. This implies that relative world output of labor intensive goods must rise therefore price of labor intestive goods will fall. This all frees up the domestic low skilled labor, which should be reabsorbed in the economy, therefore as demand of low skilled labor falls the real wages of low skilled labor would decrease.

Relative price effect rewards high skilled labor but harms low skilled labor for the usual (Stolper-Samuelson) reasons.