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Volatility due to offshoring: Theory and evidence

Author

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  • Bergin, Paul R.
  • Feenstra, Robert C.
  • Hanson, Gordon H.
Abstract
Existing models of offshoring are not equipped to explain how global production sharing affects the volatility of economic activity. This paper develops a trade model that can account for why offshoring industries in low wage countries such as Mexico experience fluctuations in employment that are twice as large as in high wage countries such as the United States. We argue that a key to explaining this outcome is that the extensive margin of offshoring responds endogenously to shocks in demand and transmits those shocks across borders in an amplified manner. Empirical evidence supports the claim that the extensive margin of offshoring is an active margin of adjustment, and quantitative simulation experiments show that the degree of movement of this margin in the data is sufficient to explain relative employment volatility in Mexico and the U.S.

Suggested Citation

  • Bergin, Paul R. & Feenstra, Robert C. & Hanson, Gordon H., 2011. "Volatility due to offshoring: Theory and evidence," Journal of International Economics, Elsevier, vol. 85(2), pages 163-173.
  • Handle: RePEc:eee:inecon:v:85:y:2011:i:2:p:163-173
    DOI: 10.1016/j.jinteco.2011.08.001
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    More about this item

    Keywords

    Offshoring; Outsourcing; Employment; Volatility; Maquiladoras;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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