Offshoring, Mismatch, and Labor Market Outcomes

Abstract

We study the role of labor market mismatch in the adjustment to a trade liberalization that results in the offshoring of high-tech production. Our model features two-sided heterogeneity in the labor market: high- and low-skilled workers are matched in a frictional labor market with high- and low-tech firms. Mismatch employment occurs when high-skilled workers choose to accept a less desirable job in the low-tech industry. The main result is that this type of job displacement is actually beneficial for the labor market in the country doing the offshoring. The reason is that mismatch allows this economy to reallocate domestic high-skilled labor across both high- and low-tech industries. In doing so, this reallocation dampens both the increase in the aggregate unemployment rate and the decline in aggregate wages that come as a consequence of shifting domestic production abroad. From a policy perspective, this result is perhaps counter-intuitive because it suggests that some degree of job dislocation is actually desirable as it helps facilitate adjustment in the labor market following a trade liberalization.