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

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

No 9973, IZA Discussion Papers from Institute of Labor Economics (IZA)

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)
Pages: 31 pages
Date: 2016-05
New Economics Papers: this item is included in nep-int
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Published - revised version published as 'Consequences of Offshoring to Developing Nations: Labor-Market Outcomes, Welfare and Corrective Interventions' in: Economic Inquiry, 2020, 58 (1), 209 -224

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Working Paper: Disentangling the Wage Impacts of Offshoring On a Developing Country: Theory and Policy (2016)
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