Offshoring, firm-level adjustment and labor market outcomes

Abstract

This paper studies how the China shock affects unemployment rates and wage inequality across high-skilled and low-skilled workers in the United States, with particular emphasis on the dynamic and general equilibrium channels of firms' production locations and entry decisions. To shed light on the subject, I build a two-country trade-in-task model with firm heterogeneity, search-and-matching labor market frictions, and firms' endogenous selections into entry and offshoring. The model, consistent with evidence from vector autoregression analyses, uncovers important dynamics with implications for the impact of the China shock on U.S. worker inequality. Namely, it shows association between a decrease in offshoring costs and a short-lived increase in low-skilled unemployment in the source country, a longer-term decline in high-skilled unemployment, a transient expansion of the wage gap between high- and low-skilled workers, and an increase in firm entry.