NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trade, Offshoring, and the Invisible Handshake

Bilgehan Karabay, John McLaren

NBER Working Paper No. 15048
Issued in June 2009
NBER Program(s):   ITI

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.

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Document Object Identifier (DOI): 10.3386/w15048

Published: Karabay, Bilgehan & McLaren, John, 2010. "Trade, offshoring, and the invisible handshake," Journal of International Economics, Elsevier, vol. 82(1), pages 26-34, September.

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