Does outsourcing provision lead to wage inequality? New evidence from Thailand’s establishment-level data

Abstract

The impacts of outsourcing provision—the arrangements whereby a firm carries out production stages for other firms—are examined on wage differentials between skilled and unskilled workers using Thailand's establishment-level data. The estimates based on a translog production function indicate that outsourcing provision augments productivity of both skilled and unskilled labor and contributes positively to wage inequality. The model predicts that a 1% increase in outsourcing provision leads to a rise in wage differentials by nearly 2.5%. The robustness check further reveals that the impacts of services provision on wage inequality are more pronounced than those of materials provision. These results highlight the importance of outsourcing provision as a new explanation of the widening skilled–unskilled wage gap in developing countries which typically emerge as a hub of outsourcing provision.