Offshoring and jobs: The myriad channels of influence

- Offshoring reallocates jobs inside and between firms, and across sectors.
- Our offshoring model includes labor market search frictions and firm heterogeneity.
- There are job-relocation, productivity, and selection effects of offshoring.
- Offshoring may cause net job creation in offshoring firms and in the industry.
- Elasticities of substitution across inputs, varieties, and of demand are crucial.

Offshoring reallocates jobs inside firms, between firms, and across sectors, affecting the economy-wide unemployment rate. We study these channels in a model with labor market frictions and two sectors-a differentiated-good sector comprising heterogeneous firms that can offshore, and a homogeneous-good sector. A decline in offshoring costs affects intrafirm and intrasectoral reallocation of jobs in the differentiated-good sector through a selection effect, a productivity effect, and a job-relocation effect. The key parameters determining the impact of offshoring on jobs at various margins, as well as on the economy-wide unemployment rate, are the elasticity of substitution between inputs, the elasticity of substitution between varieties of differentiated goods, and the elasticity of demand for differentiated goods as a whole. Changes in search frictions affect unemployment both directly and through their interaction with offshoring.