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Offshoring, Unemployment, and Wages: The Role of Labor Market Institutions

  • Priya Ranjan

    ()

    (Department of Economics, University of California-Irvine)

It is shown that when wages are determined through collective bargaining, there is a non-monotonic relationship between the cost of o§shoring and unemployment. Starting from a high cost of off- shoring, a decrease in the cost of o§shoring 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 o§shoring, starting from the present level, would reduce unemployment in Sweden. In a two country framework of o§shoring (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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File URL: http://www.economics.uci.edu/files/docs/workingpapers/2012-13/ranjan-02.pdf
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Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 121302.

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Length: 42 pages
Date of creation: Jul 2012
Handle: RePEc:irv:wpaper:121302
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