Search And Offshoring In The Presence Of "Animal Spirits"

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Executive Summary

In this paper, the authors introduce two sources of unemployment in a two-factor general equilibrium model: search frictions and fairness considerations. They find that a binding fair-wage constraint increases the unskilled unemployment rate and can at the same time lead to a higher unemployment rate for skilled workers, as compared to an equilibrium where fairness considerations are absent or non-binding. Starting from a constrained equilibrium, an increase in the fairness parameter leads to increases in both skilled and unskilled unemployment. The wage of unskilled workers increases but the wage of skilled workers decreases. Next they allow for offshoring of unskilled jobs in their model, and they find that, as a result, it becomes more likely that the fair-wage constraint binds.

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