The Elasticity of Substitution and the Sector Bias of International Outsourcing

Considering a possible sector bias of international outsourcing within a 2×2 framework, four differentscenarios appear. The relative high or the relative low-skill intensive industry can relocate either its highor its low-skill intensive production fragment. Traditionally, depending on the superiority of either thewage or the outsourcing effect, general equilibrium effects are regarded as ambiguous in two of the fourscenarios. In this contribution, I provide a formal approach and a calibration exercise for the Germaneconomy. Results show that a focus on the elasticity of substitution can complete the picture. When theelasticity exceeds a critical value, results are unambiguous in all four scenarios, supporting the existenceof the sector bias of international outsourcing