Low-skill offshoring and welfare compensation policies

Abstract

We analyze the e¤ects of low-skill o¤shoring on welfare. In the context of a matching model with di¤erent possible equilibria, we discuss two alternative policies that could potentially outweigh the negative welfare e¤ects of o¤shoring, namely, a change of the unemployment bene…ts and the ‡exibilization of the labor market. Our calibrations for the German economy suggest that the ‡exibilization of the labor market can bring low-skill workers to pre-o¤shoring welfare levels by slightly reducing the vacancy costs, something that cannot be accomplished by meddling with the unemployment bene…ts scheme. In addition, we …nd that a full compensation can be achieved by an upgrading of low-skill workers, its size depending on the type of equilibrium involved. In sum, our analysis gives support to ‡exibilization and upgrading by education as best therapies for o¤shoring.

Offshoring, Endogenous Skill Decision, and Labor Market Outcomes

“…If costs are slashed even more, then the positive e¤ects could be remarkable. Notice that these results are consistent with our previous research where the welfare-improving mechanism unleashed by increased ‡exibility has been proven to be very e¤ective in a similar context (see Agnese and Hromcová, 2016). Also, higher levels of economic growth along with higher wages will eventually help workers make the educational adjustment.…”

“…19 We turn now to a policy experiment that, in our view, could potentially restore the economy to pre-o¤shoring welfare levels. As we have shown in another place (Agnese and Hromcová, 2016), increased labor market ‡exibility can signi…cantly help in achieving this result (see also Jung and Mercenier, 2014).…”

“…We also study the e¤ect of economic growth on the skill decision of workers and …nd, quite as expected, that growth unambiguously leads to a higher share of high-skill workers and a higher overall welfare level. Labor market ‡exibility, in turn, is suggested as the complementary policy to bring welfare back to its original level, as already discussed in earlier works (see Agnese andHromcová, 2016, andJung andMercenier, 2014). In particular, we contend that it would only take a minor reduction of what we refer to as vacancy costs (e.g.…”

“…We set out to analyze the implications of the o¤shoring of low-skill activities on the labor market while allowing for an endogenous adjustment of educational skills. We draw on the previous literature of matching models like Albrecht and Vroman (2002), Rogerson et al (2005), and Davidson et al (2008), and also on our recent contribution about the potential compensating mechanisms to deal with the o¤shoring phenomenon (Agnese and Hromcová, 2016).…”

“…Figure 1 shows, with a few exceptions, a positive relationship between low-skill o¤shoring and the fraction of high-skill workers in the countries' populations. 1 Accordingly, our analysis below will highlight this mechanism while considering two broad skills (low and high) and also the di¤erent costs associated with the workers' educational choice. As we will see, this self-adjusting mechanism will not play out completely-in other words, pre-o¤shoring welfare levels are not fully restored by simply endogenizing the educational decision of workers.…”