Outsourcing and Input Volatility
The rapid growth in actual trade in intermediate goods has been matched by the rapid growth in the literature following it (Hummels et al. 2001, Bergoeing, et. al. 2004). The theoretical literature has focused on the cost-savings benefits of outsourcing (Feenstra and Hanson, 1999 and Grossman and Rossi-Hansberg 2008). In these models, final-goods producing firms can purchase their inputs from domestic and foreign intermediate-goods manufacturers. Since intermediate-goods are sold on a perfectly competitive market,the final-goods firms gain wholly from increases in outsourcing opportunities. Since the domestic …rm is thought to always benefit from outsourcing, the empirical literature has focused on the effects of outsourcing on the local labor market. These labor market effects include average wages (Amiti and Davis, 2008), average employment rates (Biscourp and Kramarz, 2007), and relative skilled/unskilled wages and employment(Feenstra and Hanson, 1997, 1999, Hsieh and Woo 2005).