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Trade, offshoring, and the invisible handshake

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  • Karabay, Bilgehan
  • McLaren, John

Abstract

We study the effect of globalization on the volatility of wages and worker welfare in a model in which risk is allocated through long-run employment relationships (the 'invisible handshake'). Globalization can take two forms: international integration of commodity markets (i.e., free trade) and international integration of factor markets (i.e., offshoring). In a two-country, two-good, two-factor model we show that free trade and offshoring have opposite effects on rich-country workers. Free trade hurts rich-country workers, while reducing the volatility of their wages; by contrast, offshoring benefits them, while raising the volatility of their wages. We thus formalize, but also sharply circumscribe, a common critique of globalization.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 82 (2010)
Issue (Month): 1 (September)
Pages: 26-34

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Handle: RePEc:eee:inecon:v:82:y:2010:i:1:p:26-34

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Offshoring Implicit contracts Invisible handshake;

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References

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Citations

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Cited by:
  1. Harrison, Ann & McLaren, John & McMillan, Margaret, 2011. "Recent perspectives on trade and inequality," Policy Research Working Paper Series 5754, The World Bank.
  2. Mitra, Devashish & Ranjan, Priya, 2007. "Offshoring and Unemployment," IZA Discussion Papers 2805, Institute for the Study of Labor (IZA).
  3. Ann Harrison & John McLaren & Margaret S. McMillan, 2010. "Recent Findings on Trade and Inequality," NBER Working Papers 16425, National Bureau of Economic Research, Inc.
  4. Mitra, Devashish & Ranjan, Priya, 2009. "Offshoring and Unemployment: The Role of Search Frictions and Labor Mobility," IZA Discussion Papers 4136, Institute for the Study of Labor (IZA).
  5. Pranab Bardhan & Dilip Mookherjee & Masatoshi Tsumagari, 2013. "Middlemen Margins and Globalization," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 81-119, November.
  6. Mitra, Devashish & Ranjan, Priya, 2010. "Offshoring and unemployment: The role of search frictions labor mobility," Journal of International Economics, Elsevier, vol. 81(2), pages 219-229, July.
  7. Silvia Rocha-Akis, 2012. "The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market," CESifo Working Paper Series 3739, CESifo Group Munich.
  8. Devashish Mitra & Priya Ranjan, 2009. "Offshoring and Unemployment: The Role of Search Frictions and Labor Minority," Working Papers id:2071, eSocialSciences.

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