Offshoring, employment, and aggregate demand

Abstract

The article uses a demand-constrained small-open-economy model in the tradition of Keynes and Kalecki to study the effects of offshoring on aggregate demand and domestic employment. Offshoring is represented as labor-saving importusing technical change. The results depend on the behavior of the markup on unit costs. If higher markups absorb the competitiveness gain, the scale effect of labor demand is negative, and offshoring unambiguously reduces domestic demand and employment. If the markup remains constant, the net effect of offshoring on domestic demand and employment is ambiguous; it depends crucially on the price elasticity of exports.

Offshoring via vertical FDI in a long-run Kaleckian Model

“…With these arguments in mind, we will suppose that the reduction in overall unit labour costs due to offshoring may lead to a higher mark-up but not to higher prices. This is similar to the approach found in Schröder (2020), where two scenarios are analysed, one of a constant mark-up (and thus falling prices) and one of a constant price (and thus rising mark-up). However, here we will also allow for intermediate effects of both an increase in the mark-up 7 Alternatively, one can allow the foreign affiliate to apply the northern mark-up upon foreign affiliate unit labour costs and arrive at much the same outcome, so long as the mark-up is not applied a second time in the North.…”

“…However, much of this work is discursive or empirical, and that which is theoretical is mostly based on partial analysis. A full model is presented by Schröder (2020), which captures some of the macroeconomics effects of offshoring via outsourcing, but this is a short-run model and it does not include foreign investment of any kind. Hence, a long-run, demand-led model, in which offshoring leads to the build-up of productive capacity abroad and which may shed light on the effects of offshoring on distribution, inflation, employment, capacity utilisation, and capital accumulation remains outstanding and should prove to be valuable.…”

“…First, offshoring is found to lead to a falling wage share as well as, in the general case, a falling price level and a rising mark-up in the North. Special cases, similar to Schröder (2020), with either a constant mark-up or a constant price level, are also entertained. The effect of offshoring on equilibrium capacity utilisation may be either negative or positive depending on the size of the effects on unit gross profits, which boost investment and hinders consumption, and on net exports, which are boosted by increased price competitiveness but hindered by higher imported inputs.…”

“…As there is not much model theoretical work on the topic of offshoring from a post-Keynesian perspective, this short part mainly summarises the approach and results of Schröder (2020), though, different to Schröder, we do so by employing a more standard neo-Kaleckian model and by introducing offshoring in a more mathematically tractable way. Since Schröder (2020) contains what is essentially a model of offshoring via outsourcing in the short run, we argue that to bring the analysis into the long run, we must allow for the accumulation of a foreign capital stock, since firms would rather avoid the fundamental uncertainty that arises from outsourcing to third-party firms in the long run. Section three presents our long-run model of offshoring and its findings, and, finally, section four concludes with a brief discussion of the relevance, implications, and limitations of this model.…”

“…Section three presents our long-run model of offshoring and its findings, and, finally, section four concludes with a brief discussion of the relevance, implications, and limitations of this model. Schröder (2020) is one of the few papers published to date-if not the only one-that formally models the effects of offshoring in a post-Keynesian model. The author, somewhat ambiguously, refers to his model as a "standard Keynes-Kalecki model" (p. 181).…”