Trade, offshoring, and the invisible handshake |
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Authors: | Bilgehan Karabay |
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Institution: | a Department of Economics, University of Auckland, Owen G. Glenn Building, 12 Grafton Road, Auckland 1010, New Zealandb Department of Economics, University of Virginia, P.O. Box 400182, Charlottesville, VA 22904-4182, United States |
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Abstract: | We study the effect of globalization on the volatility of wages and worker welfare in a model in which risk is allocated through long-run employment relationships (the ‘invisible handshake’). Globalization can take two forms: international integration of commodity markets (i.e., free trade) and international integration of factor markets (i.e., offshoring). In a two-country, two-good, two-factor model we show that free trade and offshoring have opposite effects on rich-country workers. Free trade hurts rich-country workers, while reducing the volatility of their wages; by contrast, offshoring benefits them, while raising the volatility of their wages. We thus formalize, but also sharply circumscribe, a common critique of globalization. |
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Keywords: | F10 F16 |
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