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Offshoring and Unemployment Author info | Abstract | Publisher info | Download info | Related research | Statistics Devashish Mitra () (Department of Economics, Syracuse University, NBER and IZA)
Priya Ranjan () (Department of Economics, University of California-Irvine)
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In this paper, in order to study the impact of offshoring on sectoral and economywide 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 even if the search cost is higher in the sector which experiences offshoring, the economywide rate of unemployment decreases. We also find multiple equilibrium outcomes in the extent of offshoring and therefore, in the unemployment rate. Furthermore, a firm can increase its domestic employment through offshoring. Also, such a firm's domestic employment can be higher than a firm that chooses to remain fully domestic. When we modify the model to disallow intersectoral labor mobility, the negative relative price effect on the sector in which firms offshore some of their activity becomes stronger. In such a case, it is possible for this effect to 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 the absence of intersectoral labor mobility than in the presence of it. Finally, allowing for an endogenous number of varieties provides an additional indirect channel, through which sectoral unemployment goes down due to the entry of new firms brought about by offshoring.
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Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number
060719.
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Length: 47 pages
Date of creation: May 2007Date of revision:
Handle: RePEc:irv:wpaper:060719Contact details of provider: Postal: Irvine, CA 92697-3125 Phone: (949) 824-5788 Web page: http://www.econ.uci.edu/ More information through EDIRC
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Keywords: Offshoring ; Imperfect competition ; Unemployment ; Job search ; Vacancies ; Other versions of this item:
Find related papers by JEL classification: F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies F16 - International Economics - - Trade - - - Trade and Labor Market Interactions J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
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