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Volatility due to offshoring: Theory and evidence

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Author Info

  • Bergin, Paul R.
  • Feenstra, Robert C.
  • Hanson, Gordon H.

Abstract

Existing models of offshoring are not equipped to explain how global production sharing affects the volatility of economic activity. This paper develops a trade model that can account for why offshoring industries in low wage countries such as Mexico experience fluctuations in employment that are twice as large as in high wage countries such as the United States. We argue that a key to explaining this outcome is that the extensive margin of offshoring responds endogenously to shocks in demand and transmits those shocks across borders in an amplified manner. Empirical evidence supports the claim that the extensive margin of offshoring is an active margin of adjustment, and quantitative simulation experiments show that the degree of movement of this margin in the data is sufficient to explain relative employment volatility in Mexico and the U.S.

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Bibliographic Info

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

Volume (Year): 85 (2011)
Issue (Month): 2 ()
Pages: 163-173

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Handle: RePEc:eee:inecon:v:85:y:2011:i:2:p:163-173

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

Related research

Keywords: Offshoring; Outsourcing; Employment; Volatility; Maquiladoras;

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Cited by:
  1. Richard Frensch & Jan Hanousek & Evžen Kočenda, 2012. "Incomplete specialization and offshoring across Europe," Working Papers 321, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  2. Archanun Kohpaiboon & Juthatip Jongwanich, . "Global Production Sharing and Wage Premium: Evidence from Thai Manufacturing," Chapters, Economic Research Institute for ASEAN and East Asia (ERIA).
  3. Fernandes, Ana P. & Tang, Heiwai, 2012. "Determinants of vertical integration in export processing: Theory and evidence from China," Journal of Development Economics, Elsevier, vol. 99(2), pages 396-414.
  4. Drauz, Ralf, 2014. "Re-insourcing as a manufacturing-strategic option during a crisis—Cases from the automobile industry," Journal of Business Research, Elsevier, vol. 67(3), pages 346-353.
  5. Ben Salha, Ousama, 2013. "Does economic globalization affect the level and volatility of labor demand by skill? New insights from the Tunisian manufacturing industries," Economic Systems, Elsevier, vol. 37(4), pages 572-597.
  6. Myriam Alejandra Gómez Cárdenas, 2013. "Volatility in the Mexican offshoring industry," Post-Print dumas-00910194, HAL.

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