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Search and Offshoring in the Presence of "Animal Spirits"

Author

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  • Mitra, Devashish

    (Syracuse University)

  • Ranjan, Priya

    (University of California, Irvine)

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.

Suggested Citation

  • Mitra, Devashish & Ranjan, Priya, 2009. "Search and Offshoring in the Presence of "Animal Spirits"," IZA Discussion Papers 4141, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp4141
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    References listed on IDEAS

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    More about this item

    Keywords

    fair wages; unemployment; strategic effect; offshoring;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • 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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