Offshoring, Low-skilled Immigration, and Labor Market Polarization

Federico Mandelman and Andrei Zlate

No RPA 16-3, Supervisory Research and Analysis Working Papers from Federal Reserve Bank of Boston

Abstract: During the last three decades, the U.S. labor market has been characterized by its employment polarization. As jobs in the middle of the skill distribution have shrunk, employment has expanded in high- and low-skill occupations. Real wages have not followed the same pattern. While earnings for high-skill occupations have risen robustly, wages for both low- and middle-skill workers have remained subdued. We attribute this outcome to the rise in offshoring and low-skilled immigration, and develop a three-country stochastic growth model to rationalize their asymmetric effect on employment and wages, as well as their implications for U.S. welfare. In the model, the increase in offshoring negatively affects middle-skill occupations but benefits the high-skill ones, which in turn boosts aggregate productivity. As the income of high-skill occupations rises, so does the demand for complementary services provided by low-skill workers. However, low-skill wages remain depressed due to the rise in low-skilled immigration. Native workers react to immigration by investing in training. Offshoring and low-skilled immigration improve aggregate welfare in the U.S. economy, notwithstanding their asymmetric impact on native workers of different skill levels. The model is estimated using data on real GDP, U.S. employment by skill group, and enforcement at the U.S.-Mexico border.

Keywords: International labor migration; offshoring; labor market polarization; task upgrading; heterogeneous workers (search for similar items in EconPapers)
JEL-codes: F16 F22 F41 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2016-09-30
New Economics Papers: this item is included in nep-dge, nep-int and nep-mig
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Offshoring, low-skilled immigration, and labor market polarization (2014)
Working Paper: Offshoring, Low-skilled Immigration and Labor Market Polarization (2013)
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