Offshoring, Welfare, and Flexibility in the Context of US Protectionism

Abstract

We reexamine the effects of offshoring in the US economy in the aftermath of the 2008 crisis. We use a matching model with endogenous adjustment of educational skills while distinguishing between offshoring of high and low-skill activities. We first show that offshoring leads to a restructuring of the economy through a change in the wage premium where overall welfare is improved. Moreover, in a policy exercise, we show that, if offshoring were to be opposed by a protectionist agenda, the resulting welfare losses could be counterbalanced by increased labor flexibility.