Offshoring and Unemployment

In this paper, in order to study the impact of offshoring on sectoral and economywide rates ofunemployment, we construct a two sector general equilibrium model in which labor is mobileacross the two sectors, and unemployment is caused by search frictions. We find that,contrary to general perception, wage increases and sectoral unemployment decreases due tooffshoring. This result can be understood to arise from the productivity enhancing (costreducing) effect of offshoring. If the search cost is identical in the two sectors, or even if thesearch cost is higher in the sector which experiences offshoring, the economywide rate ofunemployment decreases...