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Unemployment and Welfare Consequences of International Outsourcing under Monopolistic Competition

Abstract

This paper challenges the conventional academic view that international outsourcing is just another form of gainful trade. Contrary to this view, we show that labor-service outsourcing can reduce the high-wage country's welfare even when product-market 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, labor's welfare always falls.

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File URL: http://www.carleton.ca/economics/wp-content/uploads/cep11-07.pdf
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Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 11-07.

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Length: 24 pages
Date of creation: 06 Oct 2011
Publication status: Published: Carleton Economic Papers
Handle: RePEc:car:carecp:11-07
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Keywords: Outsourcing; Offshoring; Unemployment; Welfare; Variety;

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Find related papers by JEL classification:
  • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
  • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
  • F20 - International Economics - - International Factor Movements and International Business - - - General

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  1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
  2. Egger, Hartmut & Kreickemeier, Udo, 2008. "International fragmentation: Boon or bane for domestic employment," European Economic Review, Elsevier, vol. 52(1), pages 116-132, January.
  3. Mitra, Devashish & Ranjan, Priya, 2007. "Offshoring and Unemployment," IZA Discussion Papers 2805, Institute for the Study of Labor (IZA).
  4. 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.
  5. Jagdish Bhagwati & Arvind Panagariya, 2004. "The Muddles over Outsourcing," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 93-114, Fall.
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