Three Essays on Offshore Outsourcing and Labor Markets.

Abstract

The practice of international trade has evolved from the purchase of final goods of foreign origin to production sharing, now commonly referred to as offshore outsourcing. Due to the nature of direct replacement of domestic tasks with foreign ones, the discussions about offshore outsourcing tend to be built around the resulting job losses. However, there are not many empirical studies on this subject due to data limitations. In this dissertation, I investigate the labor market implications of offshore outsourcing. In the first two essays, I use structural models to analyze the size of employment changes - job creation as well as job destruction. The third essay takes a closer look at the readjustment process of individual workers in the new era of globalization. In the first essay, I assume firm heterogeneity in productivity to allow firms to respond to the feasibility of offshore outsourcing. Two developed (northern) countries compete. The theoretical analysis shows that the most productive firms outsource while the least productive firms exit (the Cleansing Effect) and that the aggregate employment effect is negative. The numerical analysis, however, shows that the negativity of the aggregate effect is caused by the cleansing effect, and that the employment responses of outsourcers are ambiguous. In the second essay, firms are homogeneous and face competition from firms in developing (southern) countries. The analysis compares the competitiveness of northern firms in the world market with and without offshore outsourcing. The results show that employment in the north is generally larger with outsourcing due to improved price competitiveness of their firms which generates larger sales despite its job destruction. Finally, the third essay looks into the US Trade Adjustment Assistance (TAA) program which provides retraining services to workers who are displaced due to import competition. I investigate how successful completion of occupational skills training – measured as a match between occupations of training and reemployment - improves the customers’ post-participation performance. The empirical analysis shows that receipt of training services alone does not guarantee superior post-participation performance; however, successful training – a match – significantly improves the trainees’ earnings and wage replacement rates.