Offshoring and Volatility of Demand

41 Pages Posted: 27 Jul 2016

See all articles by Sebastian Benz

Sebastian Benz

Organization for Economic Co-Operation and Development (OECD)

Wilhelm Kohler

University of Tuebingen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Erdal Yalcin

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; University of Applied Sciences Konstanz

Date Written: June 29, 2016

Abstract

In this paper we explore the role that demand uncertainty plays for the offshoring decision, and the role that offshoring plays for domestic volatility of employment. Offshoring is modeled as in Antràs & Helpman (2004), but we assume complete contracts. Firms are heterogeneous as in Melitz (2003). Uncertainty arises through recurring firm-specific shocks to demand. The presence of a cost of firing or hiring as in Bagliano & Bertola (2004) generates an intertemporal element to a firm’s employment decision in its domestic and offshore production. In this environment, offshoring is driven by differential labor market exibility as well as by wage differences. Our most important results are: 1) If the foreign labor market features a high exibility, measured relative to its wage rate, compared to the domestic labor market, then higher uncertainty has a pro-offshoring effect. And 2), under this same condition, offshoring increases volatility in domestic employment of offshoring firms and the volatility of offshore employment of these same firms is larger than volatility of domestic employment.

Keywords: offshoring, volatility, labor market flexibility

JEL Classification: F100, F120, F160

Suggested Citation

Benz, Sebastian and Kohler, Wilhelm K. and Yalcin, Erdal and Yalcin, Erdal, Offshoring and Volatility of Demand (June 29, 2016). CESifo Working Paper Series No. 5970, Available at SSRN: https://ssrn.com/abstract=2814934 or http://dx.doi.org/10.2139/ssrn.2814934

Sebastian Benz

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Wilhelm K. Kohler

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Erdal Yalcin (Contact Author)

University of Applied Sciences Konstanz ( email )

Alfred-Wachtel-Straße 8
Konstanz, 78462
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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