CanOffshoring Reduce Unemployment?1

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 is higher in the sector which experiences offshoring, the economywide rate of unemployment decreases. When we modify the model to disallow intersectoral labor mobility, the negative relative price effect on the offshoring sector may 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 this case. We thank seminar participants at Carleton University, Drexel University, the Indian School of Business (Hyderabad), Oregon State University, University of Virginia and the World Bank, and conference participants at the 2007 Globalization Conference at Kobe University in Japan, the 2008 AEA meeting in New Orleans, the Centro Studi Luca d’Agliano Conference on Outsourcing and Immigration held in Fondazione Agnelli in Turin (Italy), the Midwest International Trade Conference in Minneapolis (Spring, 2007), and the NBER Spring 2007 International Trade and Investment group meeting for useful comments and discussions. We are indebted to Pol Antras (our discussant at the 2008 AEA meetings) for very detailed comments on an earlier version. The standard disclaimer applies. Email: Devashish Mitra: [email protected]; Priya Ranjan: [email protected]