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Trade, offshoring, and the invisible handshake

  • Karabay, Bilgehan
  • McLaren, John

We study the effect of globalization on the volatility of wages and worker welfare in a model in which risk is allocated through long-run employment relationships (the 'invisible handshake'). Globalization can take two forms: international integration of commodity markets (i.e., free trade) and international integration of factor markets (i.e., offshoring). In a two-country, two-good, two-factor model we show that free trade and offshoring have opposite effects on rich-country workers. Free trade hurts rich-country workers, while reducing the volatility of their wages; by contrast, offshoring benefits them, while raising the volatility of their wages. We thus formalize, but also sharply circumscribe, a common critique of globalization.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 82 (2010)
Issue (Month): 1 (September)
Pages: 26-34

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Handle: RePEc:eee:inecon:v:82:y:2010:i:1:p:26-34
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