A North-South Trade Model of Offshoring and Unemployment

Abstract

This paper analyzes a North-South trade model with offshoring and unemployment due to union wage setting. A reduction in the cost of offshoring decreases employment in the North except possibly if there is little offshoring initially. If the scale of Northern firms also falls, then each Northern agent’s welfare declines. Unions have an incentive to reduce their own bargaining power by strategically delegating wage negotiation so as to cushion the negative employment effects.