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Search and Offshoring in the Presence of "Animal Spirits"

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Author Info
Mitra, Devashish () (Syracuse University)
Ranjan, Priya () (University of California, Irvine)

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Abstract

In this paper, we introduce two sources of unemployment in a two-factor general equilibrium model: search frictions and fairness considerations. We find that a binding fair-wage constraint increases the unskilled unemployment rate and can at the same time lead to a higher unemployment rate for skilled workers, as compared to an equilibrium where fairness considerations are absent or non-binding. Starting from a constrained equilibrium, an increase in the fairness parameter leads to increases in both skilled and unskilled unemployment. The wage of unskilled workers increases but the wage of skilled workers decreases. Next we allow for offshoring of unskilled jobs in our model, and we find that, as a result, it becomes more likely that the fair-wage constraint binds. Offshoring of unskilled jobs always leads to an increase in skilled wage, a decrease in skilled unemployment and an increase in unskilled unemployment. The presence of fairness considerations increases the adverse impact of offshoring on unskilled unemployment. The unskilled wage can increase or decrease as a result of offshoring.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4141.

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Length: 46 pages
Date of creation: Apr 2009
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Handle: RePEc:iza:izadps:dp4141

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Related research
Keywords: fair wages; unemployment; strategic effect; offshoring;

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. R oger E. A. F armer, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," The Economic Record, The Economic Society of Australia, vol. 85(3), pages 357-358, 09. [Downloadable!] (restricted)
  2. Alberto Alesina & George-Marios Angeletos, 2005. "Fairness and Redistribution," American Economic Review, American Economic Association, vol. 95(4), pages 960-980, September. [Downloadable!]
    Other versions:
  3. Kreickemeier, Udo & Nelson, Douglas, 2006. "Fair wages, unemployment and technological change in a global economy," Journal of International Economics, Elsevier, vol. 70(2), pages 451-469, December. [Downloadable!] (restricted)
  4. Mark P. Moore & Priya Ranjan, 2005. "Globalisation vs Skill-Biased Technological Change: Implications for Unemployment and Wage Inequality," Economic Journal, Royal Economic Society, vol. 115(503), pages 391-422, 04. [Downloadable!] (restricted)
  5. R oger E. A. F armer, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 357-358, 09. [Downloadable!] (restricted)
  6. Solow, Robert M, 1980. "On Theories of Unemployment," American Economic Review, American Economic Association, vol. 70(1), pages 1-11, March.
  7. Davidson, Carl & Martin, Lawrence & Matusz, Steven, 1999. "Trade and search generated unemployment," Journal of International Economics, Elsevier, vol. 48(2), pages 271-299, August. [Downloadable!] (restricted)
  8. Agell, Jonas & Lundborg, Per, 1995. "Fair Wages in the Open Economy," Economica, London School of Economics and Political Science, vol. 62(247), pages 335-51, August. [Downloadable!] (restricted)
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This page was last updated on 2009-11-23.

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