Offshoring in Developing Countries: Labor Market Outcomes, Welfare, and Policy

Bandyopadhyay, Subhayu; Basu, Arnab K.; Chau, Nancy H.; Mitra, Devashish

doi:10.20955/wp.2016.011

Working Paper

Offshoring in Developing Countries: Labor Market Outcomes, Welfare, and Policy

Abstract: Does a reduction in offshoring cost 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, worsen, as well as where wages exhibit an inverted U-shaped relationship with the offshoring cost. We identify qualitative conditions under which these relationships hold. 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;

JEL Classification: F11; F13; F16; F66; O19; O24;

https://doi.org/10.20955/wp.2016.011