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Offshoring in Developing Countries: Labor Market Outcomes, Welfare, and Policy

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  • Subhayu Bandyopadhyay
  • Arnab K. Basu
  • Nancy H. Chau
  • Devashish Mitra

Abstract

Does a reduction in offshoring cost benefit workers in the world's factories in developing countries? Using a parsimonious two-country model of offshoring we find very nuanced results. These include cases where wages monotonically improve, worsen, as well as where wages exhibit an inverted U-shaped relationship with the offshoring cost. We identify qualitative conditions under which these relationships hold. Since global welfare always rises with an improvement in offshoring technology, we find that there is a role for a wage tax or a minimum wage in the developing country. We derive the optimal levels of such policies.

Suggested Citation

  • Subhayu Bandyopadhyay & Arnab K. Basu & Nancy H. Chau & Devashish Mitra, 2016. "Offshoring in Developing Countries: Labor Market Outcomes, Welfare, and Policy," Working Papers 2016-11, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2016-011
    DOI: 10.20955/wp.2016.011
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    References listed on IDEAS

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    8. 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.
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    Cited by:

    1. Anmar Pretorius & Carli Bezuidenhout & Marianne Matthee & Derick Blaauw, 2019. "Offshoring within South African manufacturing firms: An analysis of the labour market effects," WIDER Working Paper Series wp-2019-75, World Institute for Development Economic Research (UNU-WIDER).

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    More about this item

    Keywords

    Wages; International Offshoring; Wage Tax; Minimum Wage;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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