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 o¤shoring of high-tech production. Our model features twosided heterogeneity in the labor market: high-and low-skilled workers are matched in a frictional labor market with high-and low-tech …rms. Mismatch employment occurs when high-skilled workers choose to accept a less desirable job in the low-tech industry. The main result is that-perhaps counter-intuitively-this type of job displacement is actually bene…cial for the labor market in the country doing the o¤shoring. Mismatch allows the economy to reallocate domestic high-skilled labor across both high-and low-tech industries. In doing so, mismatch 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.