Offshoring,immigration, and the native wage distribution

Abstract This paper presents a simple model that examines the impact of offshoring and immigration on wages and tests these predictions using U.S. state‐industry‐year panel data. According to the model, the productivity effect causes offshoring to have a more positive impact on low‐skilled wages than immigration, but this gap decreases with the workers’ skill level. The empirical results confirm both of these predictions and thus present direct evidence of the productivity effect. Furthermore, the results provide important insight into how specific components of offshoring and immigration affect the wages of particular types of native workers.     

Managerial capital,occupational choice and inequality in a global economy

This study proposes a simple theory of trade with endogenous firm productivity, occupational choice and income inequality. Individuals with different managerial talent choose to become entrepreneurs or workers. Entrepreneurs enhance firm productivity by investing in managerial capital. The model generates three income classes: low‐income workers facing the prospect of unemployment, middle‐income entrepreneurs managing domestic firms and high‐income entrepreneurs managing global firms. Trade liberalization policies raise unemployment and improve welfare. A reduction in per‐unit trade costs raises top incomes and generates labour‐market polarization. A reduction in fixed exporting costs has an ambiguous effect on top incomes and personal income distribution. Policies reducing labour‐market frictions or the costs of managerial‐capital acquisition create more jobs and improve welfare. The income distributional effects of labour‐market policies depend on which policy is implemented.     

CAN UNIONS HURT WORKERS? A POSITIVE ANALYSIS OF IMMIGRATION POLICY

This paper studies the determinants of immigration policy in an economy with entrepreneurs and workers where a trade union has market power over wages. The presence of the union induces a social welfare maximizing government to implement a high level of immigration, leading to a welfare loss not only from an aggregate point of view but also from the workers' point of view. When interest group politics prevails and workers' ability to influence the policy-maker is strengthened by existence of the union, we show the conditions under which workers may benefit from the presence of the union.     

Optimal policy and the role of social contacts in a search model with heterogeneous workers

This paper develops a search model with heterogeneous workers and social networks. High‐ability workers are more productive and have a larger number of professional contacts. Firms can choose between a vacancy in the regular market and a job opening in the referral market. The model predicts that a larger number of social contacts is associated with a larger wage gap between high‐ and low‐ability workers and a larger difference in the unemployment rates. The net welfare gain of referrals is estimated at 1.2%. There are three reasons for the inefficiency of the decentralized equilibrium. First is the traditional search externality described by Hosios. Second, firms share their profits with workers, whereas the social optimum implies that full surplus should be given to firms in the referral market. This inefficiency can be internalized by means of referral subsidies. Third, there is the “pooling inefficiency” in the regular market. If high‐ability workers are sufficiently more productive they impose a positive externality on low‐ability workers and should be rewarded by positive transfers. On the contrary, if productivity differences are small, high‐ability workers achieve unreasonably high wages by referring each other and reduce employment chances of low‐ability workers. In this latter case, high‐ability workers should be penalized. If optimal policy is implemented the net welfare gain of referrals rises up to 1.8%.     

The Production Life Cycle

Tasks in production have different dynamics from individuals products. We build a general equilibrium model where three forces (i.e., offshoring, learning, and wage) interact to determine how production fragmentation evolves over time. We show that the production process follows a life cycle: its fragmentation emerges, deepens, and converges. Our model is stylized and versatile, and it can be used to tractably characterize the loci of global output, productivity, welfare, and value‐added distribution as production fragmentation progresses.     

Entrepreneurial competition and its impact on the aggregate economy

This paper models entrepreneurship as the entrepreneur’s information processing activity in order to predict changes in demand and reallocate resources. The results show that allocative efficiency—and therefore aggregate productivity—increases through intensified competition by entrepreneurs grasping at opportunities. This fierce competition leads to price reductions that result in the improvement of measured aggregate productivity. The price reduction also forces relatively less able entrepreneurs to become workers. As resources are then dealt with only by relatively talented entrepreneurs, this selection effect also increases aggregate productivity. The paper also discusses how the selection effect influences the distribution of firm size.      

Age-specific entrepreneurship and PAYG: Public pensions in Germany

We present new empirical evidence on the distribution of earnings, income and wealth among entrepreneurs in Germany. We document that both earnings and income are more concentrated among entrepreneurs than among workers and describe a large-scale overlapping-generations model that replicates the age-earnings profiles of these two household types. As an application, we compute the equilibrium effects of a reform of the German pay-as-you-go pension system in which entrepreneurs must also contribute and receive a pension. We show that in the presence of mobility between workers and entrepreneurs, the expected lifetime utility of all newborn households unanimously declines due to the general equilibrium effects of lower aggregate savings, and welfare losses amount to approximately 0.7% of total consumption. In addition, the integration of self-employed workers into the social security system in Germany does not help to improve its fiscal sustainability, and only an increase in the retirement age to 70 years will help to finance pensions at the present level beyond the year 2050.     

Offshore Outsourcing and Productivity: Evidence from Japanese Firm‐level Data Disaggregated by Tasks

This paper examines the relationship of offshoring with productivity, based on the original survey data of Japanese firms. Productivity gains were found in the firms offshoring both manufacturing and service tasks, but not in the firms offshoring only either manufacturing or service tasks. This paper also finds that firms offshoring to various destinations tend to be more productive than non‐offshoring firms. These results suggest that the level of firms' engagement in offshoring is more important for productivity than whether or not firms engage in offshoring.     

Computerization and immigration: Theory and evidence from the United States

Recent technological changes have been characterized as “routine-substituting” because they reduce demand for routine tasks and increase demand for analytical and service tasks. Little is known about how these changes have impacted immigration, or task specialization between immigrants and native-born individuals. In this paper, we show that such technological progress has attracted immigrants who increasingly specialize in manual-service occupations. We also suggest that openness to immigration attenuated the job and wage polarization faced by native-born from technological changes. We explain these facts with a model of technological progress and endogenous immigration. Simulations show that unskilled immigration attenuates the drop in routine employment proceeding from technological change, enhances skill upgrading for native-born and raises economy-wide productivity and welfare.     

Labor market structure and offshoring

We consider a two‐country, two‐sector model in which a firm’s offshoring decision depends on labor market rigidities that impose additional costs on the firm. Firms endogenously choose their organizational form considering their productivity level and organizational costs. The costs generated by labor market frictions play a key role in determining the benefits of each organizational structure, and thus helps determine the conditions under which a firm decides to offshore. There are three different types of equilibria depending on the relative levels of the domestic and foreign labor market costs and the price of the intermediate input. In all equilibria, a relative rise in the domestic labor market cost increases the share of firms that offshore, while decreasing domestic integration. Furthermore, an economy with offshoring has a higher welfare level and a lower unemployment rate than it would under autarky.     

CREDIT RATIONING,RISK AVERSION,AND INDUSTRIAL EVOLUTION IN DEVELOPING COUNTRIES

Relative to their counterparts in high‐income regions, entrepreneurs in developing countries face less efficient financial markets, more volatile macroeconomic conditions, and higher entry costs. This article develops a dynamic empirical model that links these features of the business environment to cross‐firm productivity distributions, entrepreneurs’ welfare, and patterns of industrial evolution. Fit to panel data on Colombian apparel producers, the model yields estimates of a credit market imperfection index, the sunk costs of creating a new business, and various technology parameters. Model‐based counterfactual experiments suggest that improved intermediation could dramatically increase the return on assets for entrepreneurial households with modest wealth.     

Commuting in Happyville: Taxation with interjurisdictional commuting and pollution

This paper presents a spatial model of tax competition in an asymmetric duocentric city with traffic‐related pollution. Jurisdictions differ in productivity and both wage or commuting and head taxes are applied. Residential location is given, but agents can choose their workplace. We show that the incentive for the high productive jurisdiction to export the tax burden by attracting cross‐commuters is reduced by the resulting pollution import; this affects the welfare impacts of tax competition. The possibility that households may misperceive their exposure to pollution is explored and its impact of fiscal competition is analyzed. When households are very optimistic about their exposure, aggregate welfare may be higher than in the first best.     

IMMIGRATION UNEMPLOYMENT RELATIONSHIP: THE EVIDENCE FROM CANADA*

This paper examines the relationship between unemployment and immigration in Canada. The bi‐directional causality test finds no evidence of a significant effect of Canadian immigration on unemployment. Cointegration tests indicate that there is no observed increase in aggregate unemployment due to immigration in the long run. The results from the causality test based on the vector error correction model confirm that, in the short run, past unemployment does cause (less) immigration but not vice versa. There is also a long‐run positive relationship among per‐capita GDP, immigration rate and real wages. The results indicate that, in the short‐run, more immigration is possibly associated with attractive Canadian immigration policies, and in the long‐run, as the labour market adjusts, Canadian‐born workers are likely to benefit from increased migration.     

RESTRICTING EMPLOYMENT OF LOW‐PAID IMMIGRANTS: A GENERAL EQUILIBRIUM ASSESSMENT OF THE SOCIAL WELFARE IMPLICATIONS FOR LEGAL U.S. WAGE‐EARNERS

This paper builds on earlier work that used a general‐equilibrium model to show that reducing employment of unauthorized immigrants in the United States through a tighter border‐security policy lowers the average income of legal residents. Here we exploit further the detail available in the general‐equilibrium model to look at distributional effects, recognizing that the policy increases wage rates for low‐paid legal workers. We assess the social welfare effect on legal workers using a constant elasticity of substitution social welfare function. We contrast our general‐equilibrium approach to immigration analysis with the more commonly used partial‐equilibrium, econometric approach. (JEL D63, J61, C68)     

MARKET POWER AND EFFICIENCY IN A SEARCH MODEL*

We build a theoretical model to study the welfare effects and policy implications of firms’ market power in a frictional labor market. The main characteristics of our environment are that wages play a role in allocating labor across firms and the number of agents is finite. The decentralized equilibrium is inefficient and the firms’ market power results in the misallocation of workers from the high to the low productivity firms. A minimum wage exacerbates the inefficiencies by forcing the low‐productivity firms to increase their wage. Moderate unemployment benefits can increase welfare by improving the workers’ outside option.     

The welfare impact of migration with endogenous cross-border movement: An application to the European Union

In this paper, I examine the welfare impact of migration in a general equilibrium model with endogenous worker location choice. My framework incorporates labor productivity differences across countries, worker heterogeneity in productivity across skill and nativity types, as well as country-pair specific costs of migration. In a series of experiments, I predict the migration response of workers to an expansion or contraction in the number of European Union (EU) member countries. For the case of the United Kingdom (U.K.) leaving the EU, commonly referred to as Brexit, low skilled native-born U.K. workers suffer a drop-in income, whereas high skilled workers experience an increase. This result is driven, in part, by an increase in high skilled immigration to the U.K. from outside the EU, which helps to dampen the loss in income of low skilled workers.     

Offshoring,computerization, labor market polarization and top income inequality

This paper proposes a model of occupational choice with heterogeneous agents in terms of human capital to quantify the role of offshoring and computerization in labor market polarization and increased top income inequality. We find that both offshoring and computerization played a major role regarding labor market polarization in the US over the period 1975–2008. We further show that the last decades can be decomposed into two subperiods. Computerization is the main driver of labor market polarization from 1975 to the mid 1990s, after which globalization (through decreased costs of offshoring) explains more than 70% of job and wage polarization. Our model can also explain around 40% of the observed increase in top income inequality since 1975.     

FDI,Technology Spillovers,and Wages

This study distinguishes multinational firm (MNE) technology‐spillover from learning effects. Whenever learning takes time, the model predicts that foreign investors deduct the economic value of learning from wages of inexperienced workers and add it to experienced ones to prevent them from moving to local competitors. Hence, the national wage bill is unaffected by the presence of MNEs. In contrast to learning, technology spillover effects occur whenever a worker with MNE experience contributes more to local firms' than to MNEs' productivity. In this case, experienced MNE workers are hired by indigenous firms and the host country obtains a welfare gain from the presence of MNEs.     

Capital–skill complementarity and the immigration surplus

We build a neoclassical growth model with overlapping dynasties and capital–skill complementarities to evaluate changes in immigration policy. Calibrating the model using US data, we quantify the differential effects of skilled and unskilled immigration on factor returns and on the welfare of different sectors of the population. An influx of high-skilled immigrants lowers the wages of skilled workers, raises the wages of unskilled workers, and because of the relative complementarity between capital and skilled labor, substantially raises the rate of return to native-owned capital. By contrast, an influx of unskilled immigrants produces an opposite effect on wages, and has only a negligible effect on the return to capital. Because of capital–skill complementarity, an increase in the number of skilled immigrants generates an immigration surplus—the overall welfare benefit accruing to the native population—that is approximately ten times larger than the immigration surplus generated by an identical increase in the number of unskilled immigrants. This differential welfare effect is far higher than can be accounted for by the disparity between the productivities of each type of worker.     

Temporary and Permanent Immigration under Unionization

This paper investigates permanent and temporary immigration and remittance under the coexistence of unionized and non‐unionized manufacturing firms in a two‐sector economy. The impacts of immigration and remittance on respectively wages, employment, the union–non‐union wage gap and national welfare are analyzed. It is found that both permanent immigration (economy‐wide) and temporary immigration in agriculture bring positive effects on most variables (except the competitive wage), but widens the wage gap and causes income redistribution in the host country. However, if temporary immigrants work in manufacturing only, then all wages and the union–non‐union wage gap fall. That is, workers become more equally paid but poorer. In addition, remittance and globalization cause negative effects on union workers and employers. It is perhaps such consequences and the income redistribution effect of immigration that cause the media to paint a negative image of immigration.