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.