Working Paper: NBER ID: w15048
Authors: Bilgehan Karabay; John McLaren
Abstract: 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.
Keywords: globalization; wage volatility; offshoring; worker welfare
JEL Codes: F10; F16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| free trade (F10) | wage volatility (J31) |
| free trade (F10) | worker welfare (J38) |
| offshoring (F23) | wage volatility (J31) |
| offshoring (F23) | worker welfare (J38) |
| globalization (F60) | wage volatility (J31) |
| globalization (F60) | worker welfare (J38) |