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In order to assess the effects of increased outsourcing on the relative de- mand for skilled and unskilled labor, it is crucial to understand whether out- sourcing is a complement or a substitute for each kind of labor. Using the traditionally employed log-log framework, Amiti and Wei (2006) find that out- sourcing of goods and labor are complements. Using the same methodology but differentiating between skilled and unskilled labor, one would conclude that outsourcing acts as a complement to unskilled labor but as a substitute for skilled labor. This paper proposes an improved methodology which uses estimated prices for outsourcing instead of other proxies (such as its intensity) and a complete factor cost-share system of equations to find the completely opposite result, that is, outsourcing is a substitute for unskilled labor and a complement for skilled labor. This result is consistent with the findings of the literature on outsourcing and the wage gap.

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