Offshoring, Low-Skilled Immigration, and Labor Market Polarization

43 Pages Posted: 7 Sep 2017

See all articles by Federico Mandelman

Federico Mandelman

Federal Reserve Bank of Atlanta

Andrei Zlate

Federal Reserve Banks - Federal Reserve Bank of Boston

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-09-30

Abstract

During the last three decades, the U.S. labor market has been characterized by its employment polarization. As jobs in the middle of the skill distribution have shrunk, employment has expanded in high- and low-skill occupations. Real wages have not followed the same pattern. While earnings for high-skill occupations have risen robustly, wages for both low- and middle-skill workers have remained subdued. We attribute this outcome to the rise in offshoring and low-skilled immigration, and develop a three-country stochastic growth model to rationalize their asymmetric effect on employment and wages, as well as their implications for U.S. welfare. In the model, the increase in offshoring negatively affects middle-skill occupations but benefits the high-skill ones, which in turn boosts aggregate productivity. As the income of high-skill occupations rises, so does the demand for complementary services provided by low-skill workers. However, low-skill wages remain depressed due to the rise in low-skilled immigration. Native workers react to immigration by investing in training. Offshoring and low-skilled immigration improve aggregate welfare in the U.S. economy, notwithstanding their asymmetric impact on native workers of different skill levels. The model is estimated using data on real GDP, U.S. employment by skill group, and enforcement at the U.S.-Mexico border.

Keywords: International labor migration, offshoring, labor market polarization, task upgrading, heterogeneous workers

JEL Classification: F16, F22, F41

Suggested Citation

Mandelman, Federico and Zlate, Andrei, Offshoring, Low-Skilled Immigration, and Labor Market Polarization (2016-09-30). FRB Boston Risk and Policy Analysis Unit Paper No. RPA 16-3. Available at SSRN: https://ssrn.com/abstract=3033352

Federico Mandelman (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Andrei Zlate

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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