doi: 10.1002/ijet.12221 Offshoring, the threat effect, and wage inequality Yongsik Jeon * and Chul‐Woo Kwon † The eﬀects of oﬀshoring threats on the domestic skill premium are widely accepted, but theoretically unanalyzed. This study constructs a simple theoretical model based on task‐ trading oﬀshoring and collective wage bargaining models to examine the eﬀects of a ﬁrm’s oﬀshoring threat on the domestic skill premium. Theoretical analysis suggests that under a moderate demand for the ﬁnal good, the possibility of oﬀshoring could lower the wages of unskilled domestic workers, who are vulnerable to oﬀshoring, more than the wages of skilled domestic workers. Thus, even when there is no actual oﬀshoring, the skill premium between the two types of workers increases. Key words materials oﬀshoring, skill premium, threat eﬀect, wage bargaining, wage inequality JEL classiﬁcation F2, F66 “Not just the greater mobility, but the threat of it helps to hold down wages.”(Lawrence Katz 1 ) 1 Introduction Over the past several decades, the skill premium in the United States and the United Kingdom has increased dramatically: that is, these countries have seen a sharp decline in the growth rate of unskilled workers’ wages relative to those of skilled workers (Freeman 1995; Topel 1997; Acemoglu 2003a). 2 Thus, several researchers have tried to link increases in the skill premium and wage inequality in both the USA and the UK to globalization of a ﬁrm’ s activities and the integration of global economies, both of which have been remarkable phenomena over the last few decades. The bulk of the literature investigates the inﬂuence of globalization on wage inequality and the skill premium, and provides several possible in- terpretations. International Journal of Economic Theory XX (2019) 1–16 © IAET 1 * Korea Insurance Research Institute, Seoul, South Korea. † School of Economics and Trade, Kyungpook National University, Daegu, South Korea. Email: cwkwon@knu.ac.kr This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF‐2019S1A5A2A01041165). 1 As quoted in Uchitelle (2000). 2 Increases in wage inequality and the skill premium are not common phenomena in developed countries. During the 1980s and the 1990s, wage inequality and the skill premium declined in some continental European countries (Acemoglu 2003a, 2003b). Changes in the wage diﬀerential and skill premium also diﬀer across developing countries. For example, the skill premium declined in Mexico in the early 1980s, but increased in the late 1980s (Feenstra and Hanson 1997). The skill premium increased in Chile in the 1980s by 15% (Robbins 1996), but declined in Singapore during 1960–80 (Wood 1994).