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Offshoring and Unemployment: The Role of Search Frictions and Labor Minority

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  • Devashish Mitra

    ()

  • Priya Ranjan

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 unemployment is caused by search frictions. The model shows that wage increases and sectoral unemployment decreases upon offshoring in the presence of perfect intersectoral labor mobility. If, as a result, labor moves to the sector with the lower (or equal) vacancy costs, there is an unambiguous decrease in economy wide unemployment. With imperfect intersectoral labor mobility, unemployment in the offshoring sector can rise, with an unambiguous unemployment reduction in the non-offshoring sector. Imperfect labor mobility can result in a mixed equilibrium in which only some firms in the industry offshore, with unemployment in this sector rising. [IZA DP no. 4136]

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Paper provided by eSocialSciences in its series Working Papers with number id:2071.

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Date of creation: Jun 2009
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Handle: RePEc:ess:wpaper:id:2071

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Keywords: trade; unemployment; offshoring; search frictions; labor minority;

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  1. Jagdish Bhagwati & Arvind Panagariya, 2004. "The Muddles over Outsourcing," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 18(4), pages 93-114, Fall.
  2. Bardhan, Ashok Deo & Kroll, Cynthia, 2003. "The New Wave of Outsourcing," Fisher Center for Real Estate & Urban Economics, Research Reports, Fisher Center for Real Estate & Urban Economics, UC Berkeley qt02f8z392, Fisher Center for Real Estate & Urban Economics, UC Berkeley.
  3. Oleg Itskhoki & Elhanan Helpman, 2008. "Labor Market Rigidities, Trade and Unemployment," 2008 Meeting Papers 690, Society for Economic Dynamics.
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  6. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(3), pages 375-410, July.
  7. Mitra, Devashish & Ranjan, Priya, 2007. "Temporary Shocks and Offshoring: The Role of External Economies and Firm Heterogeneity," IZA Discussion Papers 2811, Institute for the Study of Labor (IZA).
  8. Carl Davidson & Steven J. Matusz, 2004. "International Trade and Labor Markets: Theory, Evidence, and Policy Implications," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, W.E. Upjohn Institute for Employment Research, number itlm.
  9. Arndt, Sven W., 1997. "Globalization and the open economy," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 8(1), pages 71-79.
  10. Artuç, Erhan & Chaudhuri, Shubham & McLaren, John, 2008. "Delay and dynamics in labor market adjustment: Simulation results," Journal of International Economics, Elsevier, Elsevier, vol. 75(1), pages 1-13, May.
  11. Mark P. Moore & Priya Ranjan, 2005. "Globalisation vs Skill-Biased Technological Change: Implications for Unemployment and Wage Inequality," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(503), pages 391-422, 04.
  12. Bilgehan Karabay & John McLaren, 2009. "Trade, Offshoring, and the Invisible Handshake," NBER Working Papers 15048, National Bureau of Economic Research, Inc.
  13. Cahuc, Pierre & Wasmer, Etienne, 2001. "Does Intrafirm Bargaining Matter In The Large Firm'S Matching Model?," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 5(05), pages 742-747, November.
  14. Davidson, Carl & Martin, Lawrence & Matusz, Steven, 1999. "Trade and search generated unemployment," Journal of International Economics, Elsevier, Elsevier, vol. 48(2), pages 271-299, August.
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