Exposure to the new wave of offshoring: An unemployment perspective

This paper examines the impact of increasing service offshoring in a two†sector economy. We find that it leads to lower domestic unemployment if the marginal task†specific offshoring cost in the service sector is sufficiently large. Under this condition, the jobs created due to enhanced productivity outweigh the jobs that are destroyed. The reduction in unemployment increases the cost of hiring domestic workers, thus encouraging firms in the manufacturing sector to increase their offshoring scale and productivity. This, in turn, increases their cost savings and may lead to a further decrease in unemployment. Hence, complementarity between two sectors’ offshoring activities may emerge. We calibrate the model using economic parameters from Belgium, and the calibration results predict varied unemployment trends and impacts on manufacturing†sector offshoring activities with different task†specific offshoring cost schedules.