International outsourcing, wage gap, and welfare

Comparing to other OECD countries, “the Japanese economy appears to not yet be fully taking advantage of international outsourcing” (Tomiura, 2008). Would the different attitudes toward international outsourcing strategy make a difference in the welfare of the economy as a whole? To address this issue, I present a three-country model to argue that a country that is engaged in international outsourcing, ceteris paribus, will have a higher wage rate than the country otherwise. Welfare improves in all countries since the benefits of international outsourcing diffuse abroad. However, the diffusion effect increases with the relative scale of the outsourcer to non-outsourcer.