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

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Listed:
  • Bandyopadhyay, Subhayu

    (Federal Reserve Bank of St. Louis)

  • Basu, Arnab K.

    (Cornell University)

  • Chau, Nancy H.

    (Cornell University)

  • Mitra, Devashish

    (Syracuse University)

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.

Suggested Citation

  • Bandyopadhyay, Subhayu & Basu, Arnab K. & Chau, Nancy H. & Mitra, Devashish, 2016. "Disentangling the Wage Impacts of Offshoring on a Developing Country: Theory and Policy," IZA Discussion Papers 9973, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp9973
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    References listed on IDEAS

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    More about this item

    Keywords

    wages; international offshoring; wage tax; minimum wage;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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