Labor Market Effects in (Neo)Classical Models of Offshoring

This fourth chapter “Labor Market Effects in (Neo)classical Models of Offshoring” evaluates the labor market and national welfare effects in existing classical and neoclassical theories. Section 4.1 studies offshoring of final goods in the Ricardian, Heckscher–Ohlin, and specific-factors model. We first study the welfare gains from trade in Samuelson's (2004) Ricardian model. The model also shows how technological progress in the foreign non-comparative advantage sector erodes all or at least some of the domestic country's previous gains from trade. Second, we evaluate the gains from trade in the basic Heckscher–Ohlin model, before presenting four theorems. Third, we analyze the effects of offshoring in the specific-factors model of Bhagwati et al. (2004). Generally, offshoring leads to social gains, but there are also scenarios where offshoring can generate welfare losses. Section 4.2 focuses on offshoring of intermediate goods. We use the Grossman and Rossi-Hansberg (2006a, b) general equilibrium model, which includes a set of intermediate tasks, to evaluate the wage effects of offshoring. Different scenarios are studied, namely the effects of offshoring low-skill-intensive tasks in a small and a large economy, the labor-supply effect and offshoring of skill-intensive tasks.