International Outsourcing, Unemployment and Welfare: A Re-Examination

24 Pages Posted: 23 Oct 2019

See all articles by Jai-Young Choi

Jai-Young Choi

Lamar University

Eden S. H. Yu

City University of Hong Kong - Department of Economics & Finance; Chu Hai College of Higher Education

Date Written: September 30, 2019

Abstract

This paper explores the ramifications of international outsourcing on unemployment, income distribution and welfare, which is an important but yet unresolved issue. Using the well-known Harris-Todaro (1970) model of sector-specific unemployment, it shows that the effects of outsourcing on employment, income-distribution and welfare depend on the sector in which the outsourcing occurs, whereby sectoral factor intensities, unemployment-outsourcing response and the dynamic stability condition play crucial roles. In particular, outsourcing in the manufacturing (primary) sector widens (narrows) income inequality by increasing (decreasing) the sectoral wage gap and raising (not affecting) the rental income of the capital owners in the economy. Moreover, outsourcing in the manufacturing (primary) sector can be welfare-decreasing (is always welfare-increasing) due to its negative (positive) employment effect mitigating (reinforcing) the primary gains from the outsourcing.

Keywords: Outsourcing, Factor-Augmenting Effect, Unemployment, Dynamic Stability, Immiserizing Growth

JEL Classification: F11, F29, F60

Suggested Citation

Choi, Jai-Young and Yu, Eden S. H., International Outsourcing, Unemployment and Welfare: A Re-Examination (September 30, 2019). East Asian Economic Review Vol. 23, No. 3 (September 2019) 261-284, DOI: 10.11644/KIEP.EAER.2019.23.3.363, Available at SSRN: https://ssrn.com/abstract=3473659 or http://dx.doi.org/10.2139/ssrn.3473659

Jai-Young Choi (Contact Author)

Lamar University ( email )

Beaumont, TX 77710
United States

Eden S. H. Yu

City University of Hong Kong - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Chu Hai College of Higher Education ( email )

Yi Lok Street Rivera Gardens
Tsuen Wan
Hong Kong

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