Offshoring and Unemployment

49 Pages Posted: 20 Jun 2007

See all articles by Devashish Mitra

Devashish Mitra

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

Priya Ranjan

University of California, Irvine - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2007

Abstract

In this paper, in order to study the impact of offshoring on sectoral and economywide rates of unemployment, we construct a two sector general equilibrium model in which labor is mobile across the two sectors, and unemployment is caused by search frictions. We find that, contrary to general perception, wage increases and sectoral unemployment decreases due to offshoring. This result can be understood to arise from the productivity enhancing (cost reducing) effect of offshoring. If the search cost is identical in the two sectors, or even if the search cost is higher in the sector which experiences offshoring, the economywide rate of unemployment decreases. We also find multiple equilibrium outcomes in the extent of offshoring and therefore, in the unemployment rate. Furthermore, a firm can increase its domestic employment through offshoring. Also, such a firm's domestic employment can be higher than a firm that chooses to remain fully domestic. When we modify the model to disallow intersectoral labor mobility, the negative relative price effect on the sector in which firms offshore some of their activity becomes stronger. In such a case, it is possible for this effect to offset the positive productivity effect, and result in a rise in unemployment in that sector. In the other sector, offshoring has a much stronger unemployment reducing effect in the absence of intersectoral labor mobility than in the presence of it. Finally, allowing for an endogenous number of varieties provides an additional indirect channel, through which sectoral unemployment goes down due to the entry of new firms brought about by offshoring.

Keywords: offshoring, unemployment, search, general equilibrium

JEL Classification: F1

Suggested Citation

Mitra, Devashish and Ranjan, Priya, Offshoring and Unemployment (May 2007). IZA Discussion Paper No. 2805. Available at SSRN: https://ssrn.com/abstract=994284

Devashish Mitra (Contact Author)

Syracuse University - Department of Economics ( email )

The Maxwell School of Citizenship & Public Affairs
133 Eggers Hall
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

Priya Ranjan

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

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