ResearcH on Imperfectly Competitive Labour Markets
Exporting and Offshoring with Monopsonistic Competition
Reference
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Hartmut Egger, Udo Kreickemeier, Christoph Moser, and Jens Wrona (2019). "Exporting and Offshoring with Monopsonistic Competition," CESifo Working Paper No. 7774, July 2019.
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Abstract
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We develop a model of international trade with a monopsonistically competitive labour marketin which firms employ skilled labour for headquarter tasks andunskilledworkerstoconductacontinuum of production tasks. Firms can enter foreign markets through exporting and throughoffshoring, and we show that due to monopsonistic competitionourmodelmakessharplydif-ferent predictions, both at the firm level and at the aggregatelevel,abouttherespectiveeffectsof the export of goods and the offshoring of tasks. At the firm-level, exporting leads to higherwages and employment, while offshoring of production tasks reduces the wages paid to unskilledworkers as well as their domestic employment. At the aggregate level, trade in goods is unam-biguously welfare increasing since domestic resources arereallocated to large firms with highproductivity, and firms with low productivities exit the market. This reduces the monopsonydistortion present in autarky, where firms restrict employment to keep wages low, resultingin too many firms that are on average too small. Offshoring on theotherhandgivesfirmsadditional scope for exercising their monopsony power by reducing their domestic size, and asaconsequencetheresourcesspentonitcanbewastefulfromasocial planner’s point of view,leading to a welfare loss.
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ResearcH on Offshoring
Trade in Tasks: Revisiting the Wage and Employment Effects of Offshoring
Reference
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Wilhelm Kohler and Jens Wrona (2019). "Trade in Tasks: Revisiting the Wage and Employment Effects of Offshoring," DICE Discussion Paper No. 320, July 2019.
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Abstract
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We revisit Grossman and Rossi-Hansberg’s (2008) famous result, that under certain conditions offshoring of low-skilled labor tasks raises the domestic wage for low-skilled workers. Our re-examination features a less benign environment where Rybczynski-type reallocation of factors to absorb offshoring-induced job displacement is ruledout. We allow for simultaneous offshoring of both skilled and unskilled labor, and we derive new results on the role of factor-bias in offshoring, identifying conditions under which offshoring has a “lifiting-all-boats” effect benefitting all workers. Extending our analysis to a frictional labor market with equilibrium unemployment due to costly matching, we demonstrate that under these same conditions offshoring is also associated with rising employment.
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Offshoring and Job Polarisation between Firms
Reference
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Hartmut Egger, Udo Kreickemeier, Christoph Moser, and Jens Wrona (2016). "Offshoring and Job Polarisation between Firms," CESifo Working Paper No. 6142, October 2016.
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Abstract
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We set up a general equilibrium model, in which offshoring to a low-wage country can lead to job polarisation in the high-wage country. Job polarisation is the result of a reallocation of labour across firms that differ in productivity and pay wages that are positively linked to their profits by a rent-sharing mechanism. Offshoring involves fixed and task-specific variable costs, and as a consequence it is chosen only by the most productive firms, and only for those tasks with the lowest variable offshoring costs. A reduction in those variable costs increases offshoring at the intensive and at the extensive margin, with domestic employment shifted from the newly offshoring firms in the middle of the productivity distribution to firms at the tails of this distribution, paying either very low or very high wages. We also study how the reallocation of labour across firms affects economy-wide unemployment. Offshoring reduces unemployment when it is confined to high-productivity firms, while this outcome is not guaranteed when offshoring is also chosen by low-productivity firms.
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Offshoring Domestic Jobs
Reference
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Hartmut Egger, Udo Kreickemeier and Jens Wrona (2015). "Offshoring Domestic Jobs," Journal of International Economics 97(1), pp. 112-125.
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Abstract
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We develop a two-country general equilibrium model, in which heterogeneous firms offshore routine tasks to a low-wage host country. In the presence of fixed costs for offshoring the most productive firms self-select into offshoring, which leads to a reallocation of domestic labor towards less productive uses if offshoring costs are high. As a consequence domestic welfare may fall. The reallocation effect is reversed and domestic welfare rises if offshoring costs are low. The aggregate income distribution, comprising wages and entrepreneurial incomes, becomes more unequal with offshoring.
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Trade, Tasks, and Training: The Effect of Offshoring on Individual Skill Upgrading
Reference
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Jan Hogrefe and Jens Wrona (2015). "Trade, Tasks, and Training: The Effect of Offshoring on Individual Skill Upgrading," Canadian Journal of Economics 48(4), pp. 1537-1560.
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Abstract
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We offer a theoretical explanation and empirical evidence for a positive link between increased offshoring and individual skill upgrading. Skill upgrading takes the form of on-the-job training, complementing the existing literature, which mainly focuses on the retraining of workers after a direct job displacement through offshoring. To establish a link between offshoring and on-the-job training, we introduce an individual skill upgrading margin into a variant of the Grossman and Rossi-Hansberg (2008) model of offshoring. By scaling up worker’s wages, offshoring in our model creates previously unexploited skill upgrading possibilities and, thus, leads to more on-the-job training. Using data from German manufacturing, we establish a causal link between the growth in industry-level offshoring and an increased on-the-job training propensity at the individual level.
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Research on Intra-national Trade
Inter-City Trade
Reference
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Tomoya Mori and Jens Wrona (2018). "Inter-city Trade" CESifo Working Paper No. 7233, September 2018.
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Abstract
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We propose and apply a new theory-consistent algorithm, which uses disaggregated inter-city trade data to identify a pyramidic city system with central places and associated hinterlands. Because central places possess more industries than the cities in their hinterlands, and because industries, which are exclusive to central places, are more likely to export to the small, peripheral cities in the central place’s hinterland, we find that aggregate exports from central places to their hinterlands are two to five times larger than predicted by gravity forces. Using a simple decomposition approach, we show that this upward bias results from aggregation along the extensive industry margin, which is why the bias is much smaller and only marginally significant if estimation is conducted in a theory-consistent way at the disaggregated industry level.
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Border effects without Borders: What Divides japan's Internal Trade?
Reference
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Jens Wrona (2018). "Border Effects without Borders: What Divides Japan's Internal Trade?" International Economic Review. 59(3), pp. 1209-1262.
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Abstract
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This paper identifies a “border effect” in the absence of a border. The finding that trade between East- and West-Japan is 23.1% - 51.3% lower than trade within both country parts, is established despite the absence of an obvious east-west division due to historical borders, cultural differences or past civil wars. Post-war agglomeration processes, reflected by the contemporaneous structure of Japan’s business and social networks, rather than cultural differences, induced by long-lasting historical shocks, are identified as an explanation for the east-west bias in intra-Japanese trade.
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Research on Migration
There and Back Again: A Simple Theory of Planned Return Migration
Reference
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Florian Knauth and Jens Wrona (2018). "There and Back Again: A Simple Theory of Planned Return Migration," DICE Discussion Paper No. 290, May 2018.
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Abstract
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We present supportive empirical evidence and a new theoretical explanation for the negative selection into planned return migration between similar regions in Germany. In our model costly temporary and permanent migration are used as imperfect signals to indicate workers’ high but otherwise unobservable skills. Production thereby takes place in teams with individual skills as strategic complements. Wages therefore are determined
by team performance and not by individual skill, which is why migration inflicts a wage loss on all workers, who expect the quality of their co-workers to decline. In order to internalise this negative migration externality, which leads to sub-optimally high levels of temporary and permanent migration in a laissez-faire equilibrium, we propose a mix of two policy instruments, which reduce initial outmigration while at the same time inducing later return migration. |
Two-Way Migration between Similar Countries
Refrence
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Udo Kreickemeier and Jens Wrona (2017). "Two-Way Migration between Similar Countries," World Economy 40(1), pp. 182-206.
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Abstract
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We develop a model to explain two-way migration of high-skilled individuals between countries that are similar in their economic characteristics. High-skilled migration results from the combination of workers whose abilities are private knowledge, and a production technology that gives incentives to firms for hiring workers of similar ability. In the presence of migration cost, high-skilled workers self-select into the group of migrants. The laissez-faire equilibrium features too much migration, explained by a negative migration externality. We also show that for sufficiently low levels of migration cost the optimal level of migration, while smaller than in the laissez-faire equilibrium, is strictly positive. Finally, we extend our model into different directions to capture stylized facts in the data and show that our baseline results also hold in these more complex modelling environments.
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Research on Poverty traps and Globalisation
Industrialisation and The Big Push in a Global Economy
Refrence
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Udo Kreickemeier and Jens Wrona (2020). "Industrialisation and the Big Push in a Global Economy," CEGE Discussion Paper No. 388, February 2020.
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Abstract
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In this paper, we develop a multi-country open economy extension of the famous BigPush model for a closed economy by Murphy et al.(1989). We show under which conditionsthe global economy in our model is caught in a poverty trap, characterised by a low-income equilibrium from which an escape is possible (only) via a coordinated modernization effort across sectors and countries. We also analyze to what extent the degree of openness matters for the prospects of achieving the high-income equilibrium. We show that under monopolistic competition with CES preferences the openness to international trade does not affect the set of parameter combinations leading to a poverty trap, whereas international trade makes it more difficult to achieve industrialisation through a Big Push with continuum quadratic preferences. Responsible for this adverse outcome is the pro-competitive effect of opening up to international trade, which bites into firms’ profit margins, rendering the adoption of a superior production technology unprofitable as it becomes more difficult for firms to amortise their adoption fixed costs.
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