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Offshoring, Mismatch, and Labor Market Outcomes

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Globalization

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Abstract

We study the role of labor market mismatch in the adjustment to a trade liberalization that results in the offshoring of high-tech production. Our model features two-sided heterogeneity in the labor market: high- and low-skilled workers are matched in a frictional labor market with high- and low-tech firms. Mismatch employment occurs when high-skilled workers choose to accept a less desirable job in the low-tech industry. The main result is that this type of job displacement is actually beneficial for the labor market in the country doing the offshoring. The reason is that mismatch allows this economy to reallocate domestic high-skilled labor across both high- and low-tech industries. In doing so, this reallocation dampens both the increase in the aggregate unemployment rate and the decline in aggregate wages that come as a consequence of shifting domestic production abroad. From a policy perspective, this result is perhaps counter-intuitive because it suggests that some degree of job dislocation is actually desirable as it helps facilitate adjustment in the labor market following a trade liberalization.

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Notes

  1. 1.

    The views in this paper are solely those of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.

  2. 2.

    The trend toward increased offshoring and more significant foreign involvement by multinational enterprises more generally is documented in Crino (2009), for example.

  3. 3.

    For example, early work by Feenstra and Hanson (1996, 1997, 1999) focuses on manufacturing offshoring, while Amiti and Wei (2005) and Gorg and Hansely (2005) focus on the rapid growth in services offshoring. These papers center primarily at the industry level. Taking yet a different approach, both Liu and Treffler (2008) and Ebenstein et al. (2011) try to measure the impact of offshoring using disaggregated data from the Current Population Survey (CPS). In still a different direction, Goos et al. (2014) examine the link between offshoring and changes in the occupational structure of employment.

  4. 4.

    This definition of skill, taken from Albrecht and Vroman (2002), is also used in Burdett and Mortensen (1998), Mortensen and Pissarides (1999), Gautier (2002), Dolado et al. (2009), and Arseneau and Epstein (2014a).

  5. 5.

    This can also be interpreted as random search, since the assumption of an aggregate meeting function is such that individuals searching for employment may encounter job opportunities that they are unwilling or unqualified to take. Alternatively, in the present context directed search would involve sectoral high- and low-tech meeting functions that take as inputs sector-specific vacancies and searchers instead of their aggregate counterparts. The existence of such sectoral meeting functions imply that workers are indeed able to only search for jobs that they are qualified for and are actually willing to take. See Epstein (2012) and Arseneau and Epstein (2014a) for more on this topic.

  6. 6.

    σ = 1 implies perfect substitutability, σ = −∞ implies perfect complementarity, and σ = 0 is the Cobb-Douglas production-function case.

  7. 7.

    In particular, Bulgaria, Lithuania, Malaysia, Philippines, Poland, and Chile.

  8. 8.

    In related work, Arseneau and Epstein (2014b) introduces on-the-job search in the present framework to better understand the response of the wage distribution to an increase in offshoring. This approach is closely linked to Burdett and Mortensen (1998), Mortensen (2005), and Dolado et al. (2009) and is supported empirically by Christensen et al. (2005).

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Authors and Affiliations

  1. Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue N.W., Washington, D.C., 20551, USA

    David M. Arseneau & Brendan Epstein

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  1. David M. Arseneau
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  2. Brendan Epstein
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Correspondence to David M. Arseneau .

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Editors and Affiliations

  1. Department of Economics and Business Economics, Aarhus University, Aarhus, Denmark

    Bent Jesper Christensen

  2. The Fletcher School, Tufts University, Medford, Massachusetts, USA

    Carsten Kowalczyk

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Arseneau, D.M., Epstein, B. (2017). Offshoring, Mismatch, and Labor Market Outcomes. In: Christensen, B., Kowalczyk, C. (eds) Globalization. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-49502-5_3

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