Fairness, Search Frictions, and Offshoring

Abstract

Fairness considerations are introduced into the determination of wages in a two factor Pissarides-style model of search unemployment to study its implications for the unemployment rates of unskilled and skilled workers in both the closed economy case and when the economy can offshore some inputs. Both fairness concerns and offshoring of jobs done by unskilled workers create the overhiring effect for skilled workers. An increase in the concern for fairness in the closed economy increases the cost of hiring unskilled workers and increases the unemployment rates of both types of workers; however, wage inequality decreases. In the open economy case, an increase in the concern for fairness leads to greater offshoring which prevents skilled unemployment from increasing, but the unemployment of unskilled workers increases. A reduction in the cost of offshoring also increases offshoring and increases the unemployment of unskilled workers, but has a positive effect on skilled workers. Due to the presence of an overhiring effect in the hiring of skilled workers for both offshoring and non-offshoring firms, skilled workers experience higher wages and lower unemployment. The opposite movements in skilled and unskilled unemployment render the net effect ambiguous. Even though wage inequality increases, the impact on the wages of unskilled workers is ambiguous.

Low-skill offshoring and welfare compensation policies

“…For example, Mitra and Ranjan (2013) suggest that a reduction in the cost of o¤shoring increases o¤shoring and the unemployment of unskilled workers, but has a positive e¤ect on skilled workers in the form of higher wages and lower unemployment. Ranjan (2013a) argues that some employment protection policies can play an important role in protecting workers against external shocks like o¤shoring.…”

Low-Skill Offshoring: Labor Market Policies and Welfare Effects

“…o where is given in (9) and is a function of the endogenous and : When V H = 0; plugging (33), ( 35) into (19) we get the = f V H =0 ( ) for high-skill workers…”

“…The o¤shoring literature has seen a recent surge in welfare analysis. For example, Mitra and Ranjan (2013) suggest that a reduction in the cost of o¤shoring increases o¤shoring and the unemployment of unskilled workers, but has a positive e¤ect on skilled workers in the form of higher wages and lower unemployment. Ranjan (2013a) argues that some employment protection policies can play an important role in protecting workers against external shocks like o¤shoring.…”