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Offshoring to a Developing Nation with a Dual Labor Market

Author

Listed:
  • Bandyopadhyay, Subhayu

    (Federal Reserve Bank of St. Louis)

  • Basu, Arnab K.

    (Cornell University)

  • Chau, Nancy H.

    (Cornell University)

  • Mitra, Devashish

    (Syracuse University)

Abstract

We present a model of offshoring of tasks to a developing nation, which is characterized by a minimum wage formal sector and a flexible wage informal sector. Some offshored tasks are outsourced by the formal sector to the lower wage informal sector. An improvement in the productivity in performing offshored tasks in the developing country raises offshoring, but not necessarily formal-to-informal outsourcing, and, in response, the developed nation wage can fall. Productivity improvements in the informal sector expand both offshoring and outsourcing, and the developed nation wage must rise. When the minimum wage is reduced, the developed nation wage falls when most of the efficiency gains accrue to the informal sector.

Suggested Citation

  • Bandyopadhyay, Subhayu & Basu, Arnab K. & Chau, Nancy H. & Mitra, Devashish, 2020. "Offshoring to a Developing Nation with a Dual Labor Market," IZA Discussion Papers 13420, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp13420
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    References listed on IDEAS

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    1. Deborah Goldschmidt & Johannes F. Schmieder, 2017. "The Rise of Domestic Outsourcing and the Evolution of the German Wage Structure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(3), pages 1165-1217.
    2. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Trading Tasks: A Simple Theory of Offshoring," American Economic Review, American Economic Association, vol. 98(5), pages 1978-1997, December.
    3. Subhayu Bandyopadhyay & Arnab K. Basu & Nancy H. Chau & Devashish Mitra, 2020. "Consequences Of Offshoring To Developing Nations: Labor‐Market Outcomes, Welfare, And Corrective Interventions," Economic Inquiry, Western Economic Association International, vol. 58(1), pages 209-224, January.
    4. Asha Sundaram, 2015. "The Impact of Trade Liberalization on Micro Enterprises: Do Banks Matter? Evidence from Indian Manufacturing," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(6), pages 832-853, December.
    5. Asha Sundaram & Reshad Ahsan & Devashish Mitra, 2012. "Complementarity between Formal and Informal Manufacturing in India: The Role of Policies and Institutions," Working Papers 1116, School of International and Public Affairs, Columbia University, revised Apr 2012.
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    More about this item

    Keywords

    informal sector; outsourcing; offshoring; dual labor markets;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business
    • J4 - Labor and Demographic Economics - - Particular Labor Markets
    • J8 - Labor and Demographic Economics - - Labor Standards

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