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Offshoring and non-monotonic employment effects across industries in general equilibrium

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  • Baumgarten, Daniel
  • Irlacher, Michael
  • Koch, Michael

Abstract

We address the mismatch between existing theoretical models and standard empirical practice in the analysis of the labor market effects of offshoring. While theory focuses on one-sector or two-sector models, empirical studies exploit variation in offshoring across a large number of industries, typically including a linear offshoring term in the analysis. Thereby, these studies implicitly assume a monotonic relationship and ignore general-equilibrium effects across industries. We analyze the effects of offshoring across a continuum of industries with different shares of offshorable tasks that are linked through labor and capital markets in general oligopolistic equilibrium (GOLE). Our main result is that offshoring generates a hump-shaped pattern of employment changes across industries. While the relocation effect reduces employment in offshoring-intensive industries, labor demand in industries with a high prevalence of domestic production falls because of rising domestic wages and firm exits in general equilibrium. In the empirical part, we test the non-monotonic employment effects of offshoring across industries by focusing on Germany after the fall of the Iron Curtain. We find strong empirical support for the hump shape in the changes of employment across industries with different scopes for offshoring, which is almost entirely due to the extensive margin, underscoring the importance of establishment entry and exit. Finally, we discuss important implications for empirical and theoretical research arising from our study.

Suggested Citation

  • Baumgarten, Daniel & Irlacher, Michael & Koch, Michael, 2018. "Offshoring and non-monotonic employment effects across industries in general equilibrium," Discussion Papers in Economics 43049, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenec:43049
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    References listed on IDEAS

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    Cited by:

    1. Harms, Philipp & Wacker, Konstantin M., 2019. "The special issue on FDI and multinational corporations: An introduction," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 13, pages 1-7.

    More about this item

    Keywords

    General oligopolistic equilibrium; Task offshoring; Offshoring and employment; Industry heterogeneity;

    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
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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