Disentangling the Wage Impacts of Offshoring on a Developing Country: Theory and Policy

31 Pages Posted: 7 Jun 2016

See all articles by Subhayu Bandyopadhyay

Subhayu Bandyopadhyay

Federal Reserve Bank of St. Louis - Research Division; IZA Institute of Labor Economics; West Virginia University

Arnab K. Basu

College of William and Mary - Department of Economics

Nancy H. Chau

Cornell University - School of Applied Economics and Management; IZA Institute of Labor Economics

Devashish Mitra

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

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Abstract

The various channels through which a reduction in the cost of offshoring can improve wages in a developed country are by now well understood. But does a similar reduction in the offshoring cost also benefit workers in the world's factories in developing countries? Using a parsimonious two-country model of offshoring we find very nuanced results. These include cases where wages monotonically improve or worsen as well as those where wages exhibit an inverted U-shaped relationship in response to parametric reductions in the cost of offshoring. We identify qualitative conditions under which wages and welfare increase or decrease in the developing world as a result of a reduction in offshoring costs. Since global welfare always rises with an improvement in offshoring technology, we find that there is a role for a wage tax or a minimum wage in the developing country. We derive the optimal levels of such policies.

Keywords: wages, international offshoring, wage tax, minimum wage

JEL Classification: F11, F13, F16, F66, O19, O24

Suggested Citation

Bandyopadhyay, Subhayu and Basu, Arnab K. and Chau, Nancy H. and Mitra, Devashish, Disentangling the Wage Impacts of Offshoring on a Developing Country: Theory and Policy. IZA Discussion Paper No. 9973. Available at SSRN: https://ssrn.com/abstract=2790010

Subhayu Bandyopadhyay (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

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IZA Institute of Labor Economics

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West Virginia University ( email )

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Arnab K. Basu

College of William and Mary - Department of Economics ( email )

Williamsburg, VA 23187-8795
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757-221-1175 (Fax)

HOME PAGE: http://faculty.wm.edu/akbasu/

Nancy H. Chau

Cornell University - School of Applied Economics and Management ( email )

Ithaca, NY 14853
United States
607-255-4463 (Phone)
607-255-9984 (Fax)

IZA Institute of Labor Economics

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

Devashish Mitra

Syracuse University - Department of Economics ( email )

The Maxwell School of Citizenship & Public Affairs
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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

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