The dynamics of profits and wages: technology, offshoring and demand*

This article explores the impact of innovation, offshoring and demand on profits and wage dynamics. Empirical analysis is performed on a panel of 37 industries (1995–2010) across five European countries. Our identification strategy relies on instrumental variables and recently proposed heteroskedasticity-based instruments. Additionally, we perform sensitivity analysis to account for omitted variables bias. The main results of our study can be summed up in three points. First, it highlights the contrasting effects of R&D and offshoring as wage determinants. Second, it shows that external demand is a key variable driving profits growth. Third, the categorisation of workers according to skill level shows that high-skilled workers are favoured by both innovation and offshoring, offshoring exerts downward pressure primarily on low-skilled wages and profits are positively correlated with high-skill wages, negatively correlated with medium-skill wages and not correlated with low-skill wages.