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Taking Public Opinion Seriously: A General Equilibrium Model of Low-Wage Competition, Offshoring, and Unemployment


  • Lutz G. Arnold
  • Stefanie Trepl


This paper analyzes a North-South trade model with costly offshoring and equilibrium unemployment due to union wage setting. Reductions in the amount of resources required in the offshoring process usually decrease employment, though the opposite can happen at a low initial level of offshoring activity. If additional offshoring leads to a fall in the scale of Northern firms, the increase in Southern workers’ utility comes at the expense of a reduction in each Northern agent’s welfare. The model can be used to make a case for a “pragmatic union leader”: unions have an incentive to take measures that reduce their bargaining power. With firm heterogeneity, there is scope for multiple equilibria.

Suggested Citation

  • Lutz G. Arnold & Stefanie Trepl, 2011. "Taking Public Opinion Seriously: A General Equilibrium Model of Low-Wage Competition, Offshoring, and Unemployment," Working Papers 101, Bavarian Graduate Program in Economics (BGPE).
  • Handle: RePEc:bav:wpaper:101_arnoldtrepl

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    References listed on IDEAS

    1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    2. Zhao, Laixun, 1998. "The Impact of Foreign Direct Investment on Wages and Employment," Oxford Economic Papers, Oxford University Press, vol. 50(2), pages 284-301, April.
    3. Lai, Edwin L. -C., 1998. "International intellectual property rights protection and the rate of product innovation," Journal of Development Economics, Elsevier, vol. 55(1), pages 133-153, February.
    4. Richard B. Freeman, 1995. "Are Your Wages Set in Beijing?," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 15-32, Summer.
    5. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
    6. Wilhelm Kohler & Jens Wrona, 2010. "Offshoring Tasks, yet Creating Jobs?," CESifo Working Paper Series 3019, CESifo Group Munich.
    7. Krugman, Paul, 1979. "A Model of Innovation, Technology Transfer, and the World Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 253-266, April.
    8. Mondal, Debasis & Gupta, Manash Ranjan, 2008. "Intellectual property rights protection and unemployment in a North South model: A theoretical analysis," Economic Modelling, Elsevier, vol. 25(3), pages 463-484, May.
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    More about this item


    offshoring; unemployment; North-South trade;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search


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