Trade, Offshoring, and the Invisible Handshake

54 Pages Posted: 8 Jun 2009 Last revised: 15 Aug 2010

See all articles by Bilgehan Karabay

Bilgehan Karabay

RMIT University, School of Economics, Finance and Marketing

John McLaren

University of Virginia; NBER

Date Written: June 2009

Abstract

We study the effect of globalization on the volatility of wages and worker welfare in a model in which risk is allocated through long-run employment relationships (the 'invisible handshake'). Globalization can take two forms: International integration of commodity markets (i.e., free trade) and international integration of factor markets (i.e., offshoring). In a two-country, two-good, two-factor model we show that free trade and offshoring have opposite effects on rich-country workers. Free trade hurts rich-country workers, while reducing the volatility of their wages; by contrast, offshoring benefits them, while raising the volatility of their wages. We thus formalize, but also sharply circumscribe, a common critique of globalization.

Suggested Citation

Karabay, Bilgehan and McLaren, John, Trade, Offshoring, and the Invisible Handshake (June 2009). NBER Working Paper No. w15048. Available at SSRN: https://ssrn.com/abstract=1415211

Bilgehan Karabay

RMIT University, School of Economics, Finance and Marketing ( email )

445 Swanston Street.
Bld. 80, Level 11
Melbourne, 3000
Australia

John McLaren (Contact Author)

University of Virginia ( email )

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Charlottesville, VA 22904-4182
United States
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434-982-2904 (Fax)

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