Trade in tasks: Revisiting the wage and employment effects of offshoring

Abstract

We examine conditions under which offshoring of labour tasks raises domestic wages and employment. Existing literature emphasizes that absorption of job displacement through intersectoral reallocation of factors is a key requirement for this outcome, mostly assuming full employment. We develop a model featuring a less benign environment that rules out such reallocation and allows for equilibrium unemployment due to costly search and matching. Assuming offshoring of both high-skilled and low-skilled labour tasks, we derive conditions under which offshoring benefits all workers in terms of both, wages and employment.