East Asian Economic Review

Korea Institute for International Economic Policy (대외경제정책연구원)
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International Outsourcing, Unemployment and Welfare: A Re-Examination

  • Choi, Jai-Young (Lamar University) ;
  • Yu, Eden S.H. (Chu Hai College of Higher Education)
  • Received : 2019.06.14
  • Accepted : 2019.09.16
  • Published : 2019.09.30
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Abstract

This paper explores the ramifications of international outsourcing on unemployment, income distribution and welfare, which is an important but yet unresolved issue. Using the well-known Harris-Todaro (1970) model of sector-specific unemployment, it shows that the effects of outsourcing on employment, income-distribution and welfare depend on the sector in which the outsourcing occurs, whereby sectoral factor intensities, unemployment-outsourcing response and the dynamic stability condition play crucial roles. In particular, outsourcing in the manufacturing (primary) sector widens (narrows) income inequality by increasing (decreasing) the sectoral wage gap and raising (not affecting) the rental income of the capital owners in the economy. Moreover, outsourcing in the manufacturing (primary) sector can be welfare-decreasing (is always welfare-increasing) due to its negative (positive) employment effect mitigating (reinforcing) the primary gains from the outsourcing.

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