International Finance Discussion Papers (IFDP)
Offshoring, Mismatch, and Labor Market Outcomes
We study the role of labor market mismatch in the adjustment to a trade liberalization that results in the offshoring of high-tech production. Our model features two-sided heterogeneity in the labor market: high- and low-skilled workers are matched in a frictional labor market with high- and low-tech firms. Mismatch employment occurs when high-skilled workers choose to accept a less desirable job in the low-tech industry. The main result is that--perhaps counter-intuitively--this type of job displacement is actually beneficial for the labor market in the country doing the offshoring. Mismatch allows the economy to reallocate domestic high-skilled labor across both high- and low-tech industries. In doing so, mismatch dampens both the increase in the aggregate unemployment rate and the decline in aggregate wages that come as a consequence of shifting domestic production abroad.
Keywords: Labor market frictions; globalization; trade liberalization; heterogeneous workers; search and matching
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