Productivity and Labor Market Effects of Offshoring to Low-Wage Countries

Productivity and Labor Market Effects of Offshoring to Low-Wage Countries Nan Zhang Doctor of Philosophy in Economics University of Virginia A major question in the globalization debate is whether offshoring of production is beneficial to the home country. This dissertation offers a theoretical framework to study the effects of offshoring on industrial productivity, employment and wage inequality. I, then, test the implications of the model, using U.S. industry trade data that is matched to individual worker data from the Current Population Survey. Offshoring increases domestic productivity and affects domestic labor differently depending on their jobs' nature - offshorability. In the theoretical part, I extend a multi-sector version of Bernard, Redding and Schott (2007) and explicitly model vertical fragmentation of production tasks across countries as motivated by Grossman and Rossi-Hansberg (2008). Wage inequality across and within industries arises due to an imperfect labor market with a notion of fairness, where wages depend on the productivity of the firm in which they work. In additional to the traditional Stolper-Samuelson effect, labor demand and relative ii wages decrease for offshorable workers as a result of huge inter-firm/industry resource reallocation. Offshoring shifts the offshorable workers to low productivity firms that pay lower wages, while promoting non-offshorable workers to offshoring firms that pay higher wages because of their increasing scale of production. The empirical findings, using U.S. industry trade data that is matched to individual worker data from the Current Population Survey, are consistent with the model's predictions. Labor market effects are heterogeneous across workers depending on how offshorable their occupations and how exposed their industries are to offshoring. A one standard deviation increase in offshoring decreases the average weekly wage about 5 percent (or $37) for an occupation with average offshorability, and offshoring can explain about a quarter of the increasing in wage inequality from 1989 to 2005. wages. Subject Classification: F1, F16, J2, J21, J24, J3, J31.

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