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Offshoring, unemployment, and wages: The role of labor market institutions

  • Ranjan, Priya

It is shown that when wages are determined through collective bargaining, there is a non-monotonic relationship between the cost of offshoring and unemployment. Starting from a high cost of offshoring, a decrease in the cost of offshoring reduces unemployment first and then increases it. The non-monotonicity of unemployment in the cost of offshoring does not obtain if wages are determined by individual Nash bargaining instead of collective bargaining. The non-monotonic relationship between the cost of offshoring and unemployment is verified through a calibration exercise performed using parameters for Sweden. The calibration exercise predicts that a decrease in the cost of offshoring, starting from the present level, would reduce unemployment in Sweden. In a two country framework of offshoring (source country and host country) it is shown how changes in the labor market institutions in one country affect labor market outcomes in both countries.

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

Volume (Year): 89 (2013)
Issue (Month): 1 ()
Pages: 172-186

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Handle: RePEc:eee:inecon:v:89:y:2013:i:1:p:172-186
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