IDEAS home Printed from https://ideas.repec.org/a/cje/issued/v47y2014i2p540-554.html
   My bibliography  Save this article

Unemployment and welfare consequences of international outsourcing under monopolistic competition

Author

Listed:
  • Richard A. Brecher
  • Zhiqi Chen

Abstract

This paper challenges the conventional academic view that international outsourcing is just another form of gainful trade. Contrary to that view, we show that labourservice outsourcing can reduce the highwage country's welfare even when productmarket trade is beneficial, within a model that combines involuntary unemployment and monopolistic competition. Outsourcing's impact on welfare is worsened by a definite loss of jobs and a possible contraction in the range of varieties produced worldwide. While owners of capital benefit from outsourcing under certain conditions, labour's welfare always falls.

Suggested Citation

  • Richard A. Brecher & Zhiqi Chen, 2014. "Unemployment and welfare consequences of international outsourcing under monopolistic competition," Canadian Journal of Economics, Canadian Economics Association, vol. 47(2), pages 540-554, May.
    • Handle: RePEc:cje:issued:v:47:y:2014:i:2:p:540-554
    DOI: 10.1111/caje.12089
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/caje.12089
    Download Restriction: access restricted to subscribers
    File URL: https://libkey.io/10.1111/caje.12089?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 43(2), pages 217-235.
    2. Matusz, Steven J, 1998. "Calibrating the Employment Effects of Trade," Review of International Economics, Wiley Blackwell, vol. 6(4), pages 592-603, November.
    3. Elhanan Helpman & Oleg Itskhoki, 2010. "Labour Market Rigidities, Trade and Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(3), pages 1100-1137.
    4. Gregory Mankiw, N. & Swagel, Phillip, 2006. "The politics and economics of offshore outsourcing," Journal of Monetary Economics, Elsevier, vol. 53(5), pages 1027-1056, July.
    5. 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(4), pages 463-479, September.
    6. Levine, David I, 1992. "Can Wage Increases Pay for Themselves? Tests with a Production Function," Economic Journal, Royal Economic Society, vol. 102(414), pages 1102-1115, September.
    7. Hartmut Egger & Udo Kreickemeier, 2017. "International Fragmentation: Boon or Bane for Domestic Employment?," World Scientific Book Chapters, in: International Trade and Labor Markets Welfare, Inequality and Unemployment, chapter 9, pages 237-263, World Scientific Publishing Co. Pte. Ltd..
    8. Mitra, Devashish & Ranjan, Priya, 2007. "Offshoring and Unemployment," IZA Discussion Papers 2805, Institute of Labor Economics (IZA).
    9. Keuschnigg, Christian & Ribi, Evelyn, 2009. "Outsourcing, unemployment and welfare policy," Journal of International Economics, Elsevier, vol. 78(1), pages 168-176, June.
    10. Richard A. Brecher & Zhiqi Chen, 2010. "Unemployment of Skilled and Unskilled Labor in an Open Economy: International Trade, Migration, and Outsourcing," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 990-1000, November.
    11. Carl Davidson & Steven J. Matusz, 2004. "International Trade and Labor Markets: Theory, Evidence, and Policy Implications," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number itlm, November.
    12. Ting Zhang, 2011. "International Outsourcing and Unemployment in a Minimum‐wage Economy," Review of International Economics, Wiley Blackwell, vol. 19(4), pages 776-786, September.
    13. Richard A. Brecher & Zhiqi Chen & Zhihao Yu, 2013. "The Trouble with Offshoring: Static and Dynamic Losses in the Presence of Unemployment," The World Economy, Wiley Blackwell, vol. 36(1), pages 1-11, January.
    14. Koskela, Erkki & Stenbacka, Rune, 2010. "Equilibrium unemployment with outsourcing and wage solidarity under labour market imperfections," European Economic Review, Elsevier, vol. 54(3), pages 376-392, April.
    15. Davis, Donald R. & Harrigan, James, 2011. "Good jobs, bad jobs, and trade liberalization," Journal of International Economics, Elsevier, vol. 84(1), pages 26-36, May.
    16. Jagdish Bhagwati & Arvind Panagariya, 2004. "The Muddles over Outsourcing," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 93-114, Fall.
    17. Mitra, Devashish & Ranjan, Priya, 2010. "Offshoring and unemployment: The role of search frictions labor mobility," Journal of International Economics, Elsevier, vol. 81(2), pages 219-229, July.
    18. Richard A. Brecher & Zhiqi Chen, 2014. "Unemployment and welfare consequences of international outsourcing under monopolistic competition," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 47(2), pages 540-554, May.
    19. Richard A. Brecher, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 88(1), pages 98-116.
    20. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Richard A. Brecher & Zhiqi Chen, 2014. "Unemployment and welfare consequences of international outsourcing under monopolistic competition," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 47(2), pages 540-554, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Richard A. Brecher & Zhiqi Chen, 2010. "Unemployment of Skilled and Unskilled Labor in an Open Economy: International Trade, Migration, and Outsourcing," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 990-1000, November.
    2. Wilhelm Kohler & Jens Wrona, 2010. "Offshoring Tasks, yet Creating Jobs?," CESifo Working Paper Series 3019, CESifo.
    3. Haiwen Zhou, 2015. "Unemployment and Economic Integration for Developing Countries," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 10(4), pages 664-690, December.
    4. Carl Davidson & Steven J. Matusz, 2010. "Our Motivation," Introductory Chapters, in: International Trade with Equilibrium Unemployment, Princeton University Press.
    5. Haiwen Zhou, 2018. "Impact of international trade on unemployment under oligopoly," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 27(4), pages 365-379, May.
    6. Felbermayr, Gabriel & Prat, Julien & Schmerer, Hans-Jörg, 2011. "Trade and unemployment: What do the data say?," European Economic Review, Elsevier, vol. 55(6), pages 741-758, August.
    7. Lukas Mohler & Rolf Weder & Simone Wyss, 2018. "International trade and unemployment: towards an investigation of the Swiss case," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 154(1), pages 1-12, December.
    8. Ranjan, Priya, 2013. "Offshoring, unemployment, and wages: The role of labor market institutions," Journal of International Economics, Elsevier, vol. 89(1), pages 172-186.
    9. Lei Wen & Haiwen Zhou, 2020. "Technology Choice, Financial Sector and Economic Integration Under the Presence of Efficiency Wages," Open Economies Review, Springer, vol. 31(1), pages 95-112, February.
    10. Wilhelm Kohler & Jens Wrona, 2021. "Trade in tasks: Revisiting the wage and employment effects of offshoring," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(2), pages 648-676, May.
    11. Bruno Decreuse & Paul Maarek, 2015. "FDI and the Labor Share in Developing Countries : A Theory and Some Evidence," Annals of Economics and Statistics, GENES, issue 119-120, pages 289-319.
    12. Thede, Susanna, 2012. "A Simple Model of Trade, Job Task Offshoring and Social Insurance," Working Papers 2012:16, Lund University, Department of Economics.
    13. Mitra, Devashish & Ranjan, Priya, 2007. "Offshoring and Unemployment," IZA Discussion Papers 2805, Institute of Labor Economics (IZA).
    14. Heid, Benedikt & Larch, Mario, 2016. "Gravity with unemployment," Journal of International Economics, Elsevier, vol. 101(C), pages 70-85.
    15. Elhanan Helpman & Oleg Itskhoki & Stephen Redding, 2010. "Trade and Labor Market Outcomes," CEP Discussion Papers dp1028, Centre for Economic Performance, LSE.
    16. Tang, Heiwai, 2012. "Labor market institutions, firm-specific skills, and trade patterns," Journal of International Economics, Elsevier, vol. 87(2), pages 337-351.
    17. Susanna Thede, 2018. "A model of trade, task offshoring and social insurance," International Economics and Economic Policy, Springer, vol. 15(4), pages 787-802, October.
    18. Lo Turco, Alessia & Maggioni, Daniela & Picchio, Matteo, 2013. "Offshoring and job stability: Evidence from Italian manufacturing," Structural Change and Economic Dynamics, Elsevier, vol. 26(C), pages 27-46.
    19. Schmerer, Hans-Jörg, 2012. "FDI, skill-specific unemployment, and institutional spillover effects," Economics Discussion Papers 2012-2, Kiel Institute for the World Economy (IfW Kiel).
    20. Richard A. Brecher & Zhiqi Chen & Zhihao Yu, 2013. "The Trouble with Offshoring: Static and Dynamic Losses in the Presence of Unemployment," The World Economy, Wiley Blackwell, vol. 36(1), pages 1-11, January.

    More about this item

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F20 - International Economics - - International Factor Movements and International Business - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cje:issued:v:47:y:2014:i:2:p:540-554. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Prof. Werner Antweiler (email available below). General contact details of provider: https://edirc.repec.org/data/ceaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.