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Disentangling the Wage Impacts of Offshoring On a Developing Country: Theory and Policy

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

No 394, Development Working Papers from Centro Studi Luca d'Agliano, University of Milano

Abstract: The various channels through which a reduction in the cost of offshoring can improve wages in a developed country are by now well understood. But does a similar reduction in the offshoring cost also benefit workers in the world's factories in developing countries? Using a parsimonious two-country model of offshoring we find very nuanced results. These include cases where wages monotonically improve or worsen as well as those where wages exhibit an inverted U-shaped relationship in response to parametric reductions in the cost of offshoring. We identify qualitative conditions under which wages and welfare increase or decrease in the developing world as a result of a reduction in offshoring costs. Since global welfare always rises with an improvement in offshoring technology, we find that there is a role for a wage tax or a minimum wage in the developing country. We derive the optimal levels of such policies.

Keywords: Wages; International Offshoring; Wage Tax; Minimum Wage (search for similar items in EconPapers)
JEL-codes: F11 F13 F16 F66 O19 O24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ger
Date: 2016-06-01, Revised 2016-06-01
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