For the last two decades, we have observed a remarkable increase in outsourcing in the world. Two strands of literature investigating this ongoing phenomenon have emerged. The first strand takes the view that the increase in outsourcing emanates from the decline in transaction costs in connection with the intensified use of information technology (see, for instance, Abraham and Taylor, 1996). The main research question in this literature concerns the impact of outsourcing activities on productivity. In the second strand, the trade-related aspects of outsourcing have attracted increasing attention (see, for instance, Feenstra and Hanson, 1996, 1999). The main subject here is the impact of outsourcing on wage inequality for skilled and unskilled workers. The former strand centers on a firm’s decision to contract out business activities and does not distinguish between international and domestic outsourcing (we have coined the term “general outsourcing” to describe this) or between skilled and unskilled labor productivity, whereas the latter strand deals with the role of mainly international outsourcing as a mechanism for moving unskilled-intensive production to unskilled-abundant countries, thereby affecting wage differentials within industries.

Is there any link between these two strands? In this paper, we argue that, given the nature of competitive economies, the skilled and unskilled labor productivity impacts of general and international outsourcing and their wage differentials may be related. Our idea is that either general outsourcing or international outsourcing may be biased toward skilled labor productivity, and thus the biased impacts on skilled labor productivity may result in wage differentials between skilled and unskilled workers in labor markets. We attempt to empirically investigate such linkages based on six-digit NAICS US manufacturing industries. We also examine what type of outsourcing is more significant in explaining the linkages.