Trade, Offshoring, and the Invisible Handshake

Bilgehan Karabay; John McLaren

doi:10.3386/w15048

Trade, Offshoring, and the Invisible Handshake

Bilgehan Karabay & John McLaren

Working Paper 15048

DOI 10.3386/w15048

Issue Date June 2009

We study the effect of globalization on the volatility of wages and worker welfare in a model in which risk is allocated through long-run employment relationships (the 'invisible handshake'). Globalization can take two forms: International integration of commodity markets (i.e., free trade) and international integration of factor markets (i.e., offshoring). In a two-country, two-good, two-factor model we show that free trade and offshoring have opposite effects on rich-country workers. Free trade hurts rich-country workers, while reducing the volatility of their wages; by contrast, offshoring benefits them, while raising the volatility of their wages. We thus formalize, but also sharply circumscribe, a common critique of globalization.

We are grateful to seminar participants at Boston University, Florida International University, the University of Maryland, Princeton University,and the University of Virginia, as well as Arnaud Costinot, some anonymous referees, the Working Group on International Trade and Organizations at the NBER and participants at the AEA meetings in 2008 and the Spring 2008 Midwest International Economics Meetings. Support from the Bankard Fund at the University of Virginia is gratefully acknowledged. The views expressed in this paper are those of the authors and are not necessarily reflective of views of the Central Bank of the Republic of Turkey. All errors are our own. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
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Trade, Offshoring, and the Invisible Handshake

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