Offshoring and Unemployment: The Role of Search Frictions and Labor Minority

In this paper, in order to study the impact of offshoring on sectoral and economy wide rates of unemployment, we construct a two sector general equilibrium model in which unemployment is caused by search frictions. The model shows that wage increases and sectoral unemployment decreases upon offshoring in the presence of perfect intersectoral labor mobility. If, as a result, labor moves to the sector with the lower (or equal) vacancy costs, there is an unambiguous decrease in economy wide unemployment. With imperfect intersectoral labor mobility, unemployment in the offshoring sector can rise, with an unambiguous unemployment reduction in the non-offshoring sector. Imperfect labor mobility can result in a mixed equilibrium in which only some firms in the industry offshore, with unemployment in this sector rising. [IZA DP no. 4136]