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Can Offshoring Reduce Unemployment?

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Author Info

  • Devashish Mitra

    ()
    (Syracuse University)

  • Priya Ranjan

    ()
    (University of California - Irvine)

Abstract

In this paper, in order to study the impact of offshoring on sectoral and economy wide rates of unemployment, we construct a two-sector, general-equilibrium model in which labor is mobile across the two sectors, and unemployment is caused by search frictions. We find that, contrary to general perception, wage increases and sectoral unemployment decreases due to offshoring. This result can be understood to arise from the productivity enhancing (cost reducing) effect of offshoring. If the search cost is identical in the two sectors, or is higher in the sector which experiences o¤shoring, the economy wide rate of unemployment decreases. When we modify the model to disallow intersectoral labor mobility, the negative relative price e¤ect on the offshoring sector may offset the positive productivity effect, and result in a rise in unemployment in that sector. In the other sector, offshoring has a much stronger unemployment reducing effect in this case.

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Bibliographic Info

Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 257.

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Length: 45
Date of creation: 01 Jul 2008
Date of revision:
Handle: RePEc:csl:devewp:257

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Cited by:
  1. Maarek, Paul & Decreuse, Bruno, 2011. "FDI and the labor share in developing countries: A theory and some evidence," Proceedings of the German Development Economics Conference, Berlin 2011 54, Verein für Socialpolitik, Research Committee Development Economics.

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