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Offshoring and Job Polarisation between Firms

41 Pages Posted: 30 Nov 2016  

Hartmut Egger

University of Bayreuth

Udo Kreickemeier

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

Christoph Moser

KOF Swiss Economic Institute

Jens Wrona

University of Tuebingen - Faculty of Economics and Social Sciences

Date Written: October 27, 2016

Abstract

We set up a general equilibrium model, in which offshoring to a low-wage country can lead to job polarisation in the high-wage country. Job polarisation is the result of a reallocation of labour across firms that differ in productivity and pay wages that are positively linked to their profits by a rent-sharing mechanism. Offshoring involves fixed and task-specific variable costs, and as a consequence it is chosen only by the most productive firms, and only for those tasks with the lowest variable offshoring costs. A reduction in those variable costs increases offshoring at the intensive and at the extensive margin, with domestic employment shifted from the newly offshoring firms in the middle of the productivity distribution to firms at the tails of this distribution, paying either very low or very high wages. We also study how the reallocation of labour across firms affects economy-wide unemployment. Offshoring reduces unemployment when it is confined to high-productivity firms, while this outcome is not guaranteed when offshoring is also chosen by low-productivity firms.

Keywords: offshoring, job polarisation, heterogeneous firms, unemployment

JEL Classification: F120, F160, F230

Suggested Citation

Egger, Hartmut and Kreickemeier, Udo and Moser, Christoph and Wrona, Jens, Offshoring and Job Polarisation between Firms (October 27, 2016). CESifo Working Paper Series No. 6142. Available at SSRN: https://ssrn.com/abstract=2877095

Hartmut Egger

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Udo Kreickemeier (Contact Author)

University of Tuebingen ( email )

DE-72074 Tubingen
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Christoph Moser

KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Jens Wrona

University of Tuebingen - Faculty of Economics and Social Sciences ( email )

Mohlstrasse 36
Tuebingen, Baden-Wuerttemberg 72074
Germany

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