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Search and Offshoring in the Presence of "Animal Spirits"

Author

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  • Mitra, Devashish

    () (Syracuse University)

  • Ranjan, Priya

    () (University of California, Irvine)

Abstract

In this paper, we introduce two sources of unemployment in a two-factor general equilibrium model: search frictions and fairness considerations. We find that a binding fair-wage constraint increases the unskilled unemployment rate and can at the same time lead to a higher unemployment rate for skilled workers, as compared to an equilibrium where fairness considerations are absent or non-binding. Starting from a constrained equilibrium, an increase in the fairness parameter leads to increases in both skilled and unskilled unemployment. The wage of unskilled workers increases but the wage of skilled workers decreases. Next we allow for offshoring of unskilled jobs in our model, and we find that, as a result, it becomes more likely that the fair-wage constraint binds. Offshoring of unskilled jobs always leads to an increase in skilled wage, a decrease in skilled unemployment and an increase in unskilled unemployment. The presence of fairness considerations increases the adverse impact of offshoring on unskilled unemployment. The unskilled wage can increase or decrease as a result of offshoring.

Suggested Citation

  • Mitra, Devashish & Ranjan, Priya, 2009. "Search and Offshoring in the Presence of "Animal Spirits"," IZA Discussion Papers 4141, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp4141
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    References listed on IDEAS

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    1. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 255-283.
    2. Solow, Robert M, 1980. "On Theories of Unemployment," American Economic Review, American Economic Association, vol. 70(1), pages 1-11, March.
    3. Alberto Alesina & George-Marios Angeletos, 2005. "Fairness and Redistribution," American Economic Review, American Economic Association, vol. 95(4), pages 960-980, September.
    4. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
    5. Cahuc, Pierre & Wasmer, Etienne, 2001. "Does Intrafirm Bargaining Matter In The Large Firm'S Matching Model?," Macroeconomic Dynamics, Cambridge University Press, vol. 5(05), pages 742-747, November.
    6. Lars A. Stole & Jeffrey Zwiebel, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Oxford University Press, vol. 63(3), pages 375-410.
    7. Agell, Jonas & Lundborg, Per, 1995. "Fair Wages in the Open Economy," Economica, London School of Economics and Political Science, vol. 62(247), pages 335-351, August.
    8. Udo Kreickemeier & Douglas Nelson, 2017. "Fair Wages, Unemployment, and Technological Change in a Global Economy," World Scientific Book Chapters,in: International Trade and Labor Markets Welfare, Inequality and Unemployment, chapter 8, pages 205-235 World Scientific Publishing Co. Pte. Ltd..
    9. Davidson, Carl & Martin, Lawrence & Matusz, Steven, 1999. "Trade and search generated unemployment," Journal of International Economics, Elsevier, vol. 48(2), pages 271-299, August.
    10. Roger E. A. Farmer, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 357-358, September.
    11. H.N.S. Karunatilake, 2005. "Review Article," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 6(1), pages 131-138, March.
    12. Mark P. Moore & Priya Ranjan, 2005. "Globalisation vs Skill-Biased Technological Change: Implications for Unemployment and Wage Inequality," Economic Journal, Royal Economic Society, vol. 115(503), pages 391-422, April.
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    More about this item

    Keywords

    fair wages; unemployment; strategic effect; offshoring;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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