Offshoring, unemployment, and wages: The role of labor market institutions

It is shown that when wages are determined through collective bargaining, there is a non-monotonic relationship between the cost of offshoring and unemployment. Starting from a high cost of offshoring, a decrease in the cost of offshoring reduces unemployment first and then increases it. The non-monotonicity of unemployment in the cost of offshoring does not obtain if wages are determined by individual Nash bargaining instead of collective bargaining. The non-monotonic relationship between the cost of offshoring and unemployment is verified through a calibration exercise performed using parameters for Sweden. The calibration exercise predicts that a decrease in the cost of offshoring, starting from the present level, would reduce unemployment in Sweden. In a two country framework of offshoring (source country and host country) it is shown how changes in the labor market institutions in one country affect labor market outcomes in both countries. (C) 2012 Elsevier B.V. All rights reserved.