Intraindustry trade and the gains from fragmentation

The process of cross-border production fragmentation has received much attention as a possible source of deteriorating labor-market prospects, in particular for low-skilled workers. Of the research that has concentrated on the labor-market consequences of intra-product specialization, some has been rather skeptical of whether this notion generally holds true. The paper complements this research insofar as we explicitly acknowledge that fragmentation is associated with increasing returns as they might give rise to additional labor market and welfare effects. Though these effects tend to benefit high-skilled labor, we can also identify cases in which it is the low-skilled that benefit the most. In any case, there is a range of parameter values for which both skill levels do better.