Outsourcing and International Labor Mobility: A Political Economy Analysis

Abstract

We analyze the political economy of worker displacement, in an environment characterized by individual-specific uncertainty about the precise distributional consequences of a change in the economic environment. This change allows the displacement of high-paid Northern workers by low-paid, skilled Southern workers who were previously barred from competing with Northern workers, due to restrictions on the mobility of workers, and/or because of technological limits on the mobility of jobs. But while a policy of relative openness may be economically efficient, it may also have adverse distributional consequences. The dilemma faced by the Northern politician is that limiting the inflow of human capital might exacerbate the outflow of jobs, as firms “outsource” or “offshore” tasks that had previously been performed domestically. In particular, why does the outsourcing of service sector jobs have greater political resonance than the loss of manufacturing jobs? Why does the displacement of information technology workers seem to generate a disproportionate amount of political backlash? We trace the political implications of differences in the “vulnerability” of workers, and suggest that one answer may lie in the general-purpose nature of information technology, which allows greater mobility of workers and tasks across sectors than an improvement in sector-specific productivity.