Publications
- Fair Wages and Foreign Sourcing
- Download: PDF 263.37 KB
- by Helpman, Elhanan
- We develop a simple general equilibrium model for studying the impact of workersrelative-wage concerns on resource allocation and the organization of production. We characterize equilibria for the closed economy and for an open economy in which an intermediate input can be
produced o¤shore. In the closed economy,
firms that are otherwise identical may have different
hiring practices and pay different wages to low-skill workers. In the open economy, some
firms
perform all production at home while others produce all of the intermediate input offshore. We
show that relative-wage concerns add to incentives for offshoring. Offshore production may take
place in the presence of relative-wage concerns in situations where it would not be pro
table in
their absence. And if offshoring takes place with or without such concerns, the extent of offshore production is greater in the former setting than in the latter. We further show that when
workers are concerned about relative pay, the equilibrium does not maximize the economys net
output. Nonetheless, the competitive equilibrium with o¤shoring is constrained Pareto efficient.
- Publication Type: WCFIA Working Paper
- Published Date: January 29, 2007
- Field of Interest: International Economics
- Helpman, Elhanan, and Gene Grossman. "Fair Wages and Foreign Sourcing." Working Paper 2008-0045, Weatherhead Center for International Affairs, Harvard University, January 2007.
