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Threatening to Offshore in a Search Model of the Labor Market

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  • Sylvain Leduc

    (Federal Reserve Bank of San Francisco)

  • David Arseneau

    (Federal Reserve Board)

Abstract

We develop a two-country labor search model in which a multinational firm engages in production sharing by hiring both domestic and foreign labor to produce a final good. A key innovation to the model is the sequential nature of labor markets which allows the ability of the multinational to shift production oversees to enter into its outside option in domestic wage negotiations. This feature allows us to articulate the threat effect is a very tractable way. Using this framework, we derive a model-based estimate of the effect that the threat of offshoring has on global wages and labor market allocations. In the short run, when firm entry and the capital stock are both impeded from fully adjusting to an increase in globalization, we find that the threat has sizable effects: domestic wages are lower, jobs are reallocated abroad, and the unemployment rate is higher. In contrast, when entry and adjustment of the capital stock are free to adjust, we find that the threat of offshoring has a minimal impact. These results highlight the importance of taking into account transition dynamics when evaluating the effects of changes in trade policy.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 943.

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Date of creation: 2012
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Handle: RePEc:red:sed012:943

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  1. Felbermayr, Gabriel & Prat, Julien & Schmerer, Hans-Jörg, 2011. "Globalization and labor market outcomes: Wage bargaining, search frictions, and firm heterogeneity," Munich Reprints in Economics 20471, University of Munich, Department of Economics.
  2. Davidson, Carl & Matusz, Steven J. & Shevchenko, Andrei, 2008. "Outsourcing Peter To Pay Paul: High-Skill Expectations And Low-Skill Wages With Imperfect Labor Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 12(04), pages 463-479, September.
  3. Shigeru Fugita & Garey Ramey, 2006. "Job matching and propagation," Working Papers 06-13, Federal Reserve Bank of Philadelphia.
  4. Eckel, Carsten & Egger, Hartmut, 2009. "Wage bargaining and multinational firms," Munich Reprints in Economics 20528, University of Munich, Department of Economics.
  5. David M. Arseneau & Sanjay K. Chugh, 2009. "Tax smoothing in frictional labor markets," International Finance Discussion Papers 965, Board of Governors of the Federal Reserve System (U.S.).
  6. Davidson, Carl & Matusz, Steven J. & Shevchenko, Andrei, 2008. "Globalization and firm level adjustment with imperfect labor markets," Journal of International Economics, Elsevier, vol. 75(2), pages 295-309, July.
  7. Dutt, Pushan & Mitra, Devashish & Ranjan, Priya, 2009. "International trade and unemployment: Theory and cross-national evidence," Journal of International Economics, Elsevier, vol. 78(1), pages 32-44, June.
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Cited by:
  1. Andrei Zlate, 2010. "Offshore production and business cycle dynamics with heterogeneous firms," International Finance Discussion Papers 995, Board of Governors of the Federal Reserve System (U.S.).

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