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OUTSOURCING PETER TO PAY PAUL: HIGH-SKILL EXPECTATIONS AND LOW-SKILL WAGES WITH IMPERFECT LABOR MARKETS

Published online by Cambridge University Press:  01 September 2008

Carl Davidson ,
Steven J. Matusz  and
Andrei Shevchenko
Carl Davidson
Affiliation:
Michigan State University and GEP, University of Nottingham
Steven J. Matusz
Affiliation:
Michigan State University and GEP, University of Nottingham
Andrei Shevchenko*
Affiliation:
Michigan State University
*
Address correspondence to: Andrei Shevchenko, Department of Economics, Michigan State University, East Lansing, MI 48824, USA; e-mail: shevchen@msu.edu.
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Abstract

In this paper, we investigate the impact of globalization on wages earned by low- and high-skill workers when openness leads to the outsourcing of high-tech jobs abroad. We have shown that low-skill workers may become considerably better off after globalization because high-skill workers start accepting low-tech jobs. The switch in the behavior of high-skill workers brings about general equilibrium responses from the firm side of the labor market with the outside options for low-skill workers improving significantly. This feedback works as a magnification mechanism that leads to a discontinuous wage increase that one would not be able to get without careful modeling of the frictions in the labor market.

Keywords

OutsourcingGlobalizationSearch FrictionsExpectations

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Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 4 , September 2008 , pp. 463 - 479
Copyright
Copyright © Cambridge University Press 2008

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