OUTSOURCING PETER TO PAY PAUL: HIGH-SKILL EXPECTATIONS AND LOW-SKILL WAGES WITH IMPERFECT LABOR MARKETS

Carl Davidson (), Steven Matusz and Andrei Shevchenko

Macroeconomic Dynamics, 2008, vol. 12, issue 4, 463-479

Abstract: In this paper, we investigate the impact of globalization on wages earned by low- and high-skill workers when openness leads to the outsourcing of high-tech jobs abroad. We have shown that low-skill workers may become considerably better off after globalization because high-skill workers start accepting low-tech jobs. The switch in the behavior of high-skill workers brings about general equilibrium responses from the firm side of the labor market with the outside options for low-skill workers improving significantly. This feedback works as a magnification mechanism that leads to a discontinuous wage increase that one would not be able to get without careful modeling of the frictions in the labor market.

Date: 2008
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