Can Offshoring Reduce Unemployment?

45 Pages Posted: 10 May 2009

See all articles by Devashish Mitra

Devashish Mitra

Syracuse University - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Priya Ranjan

University of California, Irvine - Department of Economics

Date Written: July 2008

Abstract

In this paper, in order to study the impact offshoring on sectoral and economywide rates of unemployment, we construct a two-sector, general-equilibrium model in which labor is mobile across the two sectors, and unemployment is caused by search frictions. We find that, contrary to general perception, wage increases and sectoral unemployment decreases due to offshoring. This result can be understood to arise from the productivity enhancing (cost reducing) effect of offshoring. If the search cost is identical in the two sectors, or is higher in the sector which experiences offshoring, the economywide rate of unemployment decreases. When we modify the model to disallow intersectoral labor mobility, the negative relative price effect on the offshoring sector may offset the positive productivity effect, and result in a rise in unemployment in that sector. In the other sector, offshoring has a much stronger unemployment reducing effect in this case.

Keywords: offshoring, unemployment, employment, labour, labour mobility

JEL Classification: F22

Suggested Citation

Mitra, Devashish and Ranjan, Priya, Can Offshoring Reduce Unemployment? (July 2008). Centro Studi Luca d'Agliano Development Studies Working Paper No. 257. Available at SSRN: https://ssrn.com/abstract=1398728 or http://dx.doi.org/10.2139/ssrn.1398728

Devashish Mitra (Contact Author)

Syracuse University - Department of Economics ( email )

The Maxwell School of Citizenship & Public Affairs
133 Eggers Hall
Syracuse, NY 13244-1020
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Priya Ranjan

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

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