Volatility due to offshoring: Theory and evidence |
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| Institution: | 1. Department of Economics, University of California at Davis, One Shields Ave., Davis, CA 95616, USA;2. NBER, USA;3. University of California, San Diego, 9500 Gilman Dr., MC: 0519 La Jolla, CA 92093-0519, USA;1. Center for Energy and Environmental Policy Research, Institute of Policy and Management, Chinese Academy of Sciences, Beijing, China;2. Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, China;1. Kyungpook National University, 80 Daehak-ro, Buk-gu, Daegu 41566, Republic of Korea;2. Daegu University, 201 Daegudae-ro, Gyeongsan, Gyeongsangbuk-do 38453, Republic of Korea;1. Harvard University, Cambridge, MA, USA;2. National Bureau of Economic Research, Cambridge, MA, USA;3. Centre for Economic Policy Research, London, UK;4. Princeton University, Princeton, NJ, USA;1. University of Exeter, Department of Economics, Exeter, EX4 4PU, UK;2. School of Advanced International Studies, Johns Hopkins University, Washington, DC 20036, USA;1. School of Statistics, University of International Business and Economics, China;2. Academy of Mathematics and Systems Science, Chinese Academy of Sciences, China;3. School of International Trade and Economics, University of International Business and Economics, China;4. Research Institute for Global Value Chains, University of International Business and Economics, China |
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| Abstract: | Existing models of offshoring are not equipped to explain how global production sharing affects the volatility of economic activity. This paper develops a trade model that can account for why offshoring industries in low wage countries such as Mexico experience fluctuations in employment that are twice as large as in high wage countries such as the United States. We argue that a key to explaining this outcome is that the extensive margin of offshoring responds endogenously to shocks in demand and transmits those shocks across borders in an amplified manner. Empirical evidence supports the claim that the extensive margin of offshoring is an active margin of adjustment, and quantitative simulation experiments show that the degree of movement of this margin in the data is sufficient to explain relative employment volatility in Mexico and the U.S. |
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