CONSEQUENCES OF OFFSHORING TO DEVELOPING NATIONS: LABOR‐MARKET OUTCOMES, WELFARE, AND CORRECTIVE INTERVENTIONS

Subhayu Bandyopadhyay, Arnab Basu, Nancy Chau and Devashish Mitra ()

Economic Inquiry, 2020, vol. 58, issue 1, 209-224

Abstract: Our parsimonious two‐country (developed country and developing country) model of offshoring provides nuanced results. These include cases where wages monotonically improve, as well as where wages exhibit an inverted‐U relationship with offshoring cost reductions. We identify conditions under which these relationships hold. Since global welfare always rises with improvements in offshoring technology, we find that there is a role for a minimum wage (alternatively, wage tax) in the developing country. We derive such a policy's optimal level. There is also the possibility of a developed country optimal offshoring tax for extracting terms‐of‐trade benefits. We, finally, analyze the two‐country Nash equilibrium in policies. (JEL F11, F13, F16, F66, O19, O24)

Date: 2020
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