The Cleansing Effect of Offshoring in an Analysis of Employment

This paper uses a partial equilibrium heterogeneous firm model to explore distinctive firm-level operational responses to offshoring and the resulting short-run employment effect. We find that the industry-level effect is unambiguously negative and this is largely due to large job destruction from the exits of the least productive firms (Cleansing Effect). The numerical analysis, calibrated to the U.S. manufacturing sector, confirms the dominance of the cleansing effect in driving the reduction in industry-level employment. Offshorers still account for the majority of total job destruction; however, this is offset by subsequent job creation, partly from the increase in export opportunities.