Offshoring And Unemployment

In this paper, in order to study the impact of offshoring on sectoral and economywide rates of unemployment, the authors construct a two sector general equilibrium model in which labor is mobile across the two sectors, and unemployment is caused by search frictions. They 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. They also find multiple equilibrium outcomes in the extent of offshoring and therefore, in the unemployment rate.