Labor arbitrage : impact of offshoring in the U.S. labor market

Abstract

The rapid growth of offshoring has ignited a contentious debate over its impact on the US labor market. Between 1983 and 2002, the United States economy lost 6 million jobs in manufacturing and income inequality increased sharply [Ebenstein, 2011]. Today due to the falling costs of transportation, coordination and communication this tendency is accelerating affecting both white and blue collar workers. While there many papers that analyze the productivity increase due to offshoring practices [Mitra, 2007], [Global Insight, 2004], [Houseman, 2010], most of them just assume that this improvement is automatically translated into lower prices therefore benefiting consumers. Nevertheless this assumption only holds in price competitive markets, which is not always the case. In this paper I will challenge the assumption of price competitive markets and argue how offshoring increases within-country income inequality. In addition I will analyze the aggregated effect of offshoring in the U.S. economy through both empirical and theoretical approaches.