A model of occupational choice, offshoring and immigration

• Author: Bulent Unel
• Published date: 01 February 2019
• Date: 01 February 2019
• DOI: http://doi.org/10.1111/roie.12375

Rev Int Econ. 2019;27:267–289. wileyonlinelibrary.com/journal/roie © 2018 John Wiley & Sons Ltd

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INTRODUCTION

Cheaper labor in developing economies combined with lower trade barriers and improved commu-

nication channels since the early 1980s have intensified offshoring among companies in developed

countries. During the same period, immigration to advanced countries has increased substantially.

For example, according to U.S. census data, immigrants’ share of the total U.S. population rose from

about 6% in 1980 to more than 13% in 2015. The trends in offshoring and immigration have been

hotly debated among policy makers and academics because of their economic and social implications.

This paper develops a two‐country, general equilibrium model of task trade to investigate the im-

pact of immigration and offshoring on occupational choice, firm productivity, income inequality, and

welfare. The model has three important features. First, individuals choose to become entrepreneurs or

workers depending on their abilities. Second, tasks are tradable as in Grossman and Rossi‐Hansberg

(2008), and each task can be performed by native workers, immigrant workers, or offshore workers.1

Third, entrepreneurs can improve their firm productivity by investing in managerial capital.

The model predicts that assimilating immigrants with Home induces them to perform more com-

plex tasks. Since immigrants are more intensively used by non offshoring firms, this policy will make

Received: 2 October 2017

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Revised: 9 July 2018

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Accepted: 11 July 2018

DOI: 10.1111/roie.12375

ORIGINAL ARTICLE

A model of occupational choice, offshoring and

immigration

Bulent Unel

Department of Economics,Louisiana State

University, Baton Rouge, Louisiana

Correspondence

Bulent Unel, Department of Economics,

Louisiana State University, Baton Rouge, LA

70803.

Email: bunel@lsu.edu

Abstract

This paper develops a two‐country model of offshoring

and immigration with occupational choice and endoge-

nous firm productivity. Individuals in Home choose to be-

come entrepreneurs or workers, whereas those in Foreign

can only be employed as workers. Entrepreneurs produce

output using a fixed set of tasks that can be performed lo-

cally or abroad. The model predicts that pro‐immigration

policies increase the number of entrepreneurs, raise pro-

ductivity, and improve the aggregate welfare. It also pre-

dicts that lowering offshoring costs generates job

polarization and welfare polarization, but improves the

aggregate welfare.

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UNEL

non offshoring firms relatively more profitable; as a result, the number of non offshoring entrepre-

neurs increases and that of offshoring ones decreases. Under this policy, non offshoring firms acquire

more managerial capital and have higher productivity, whereas offshoring firms acquire less mana-

gerial capital and have lower firm productivity. Finally, assimilating immigrants with Home has an

ambiguous effect on income/welfare distribution, but improves the aggregate welfare. The model also

predicts that increasing the number of immigrants has several desirable effects on the Home economy.

It increases the mass of entrepreneurs, induces them to improve their firm productivity, and improves

the aggregate welfare.

Reducing variable offshoring costs increases the set of tasks performed by offshore workers by

downgrading tasks performed by immigrant workers and upgrading tasks performed by native work-

ers. This policy generates job polarization by increasing the mass of workers and offshoring entre-

preneurs at the expense of the moderately skilled entrepreneurs. Under this policy, offshoring firms

acquire more managerial capital (hence, have higher firm productivity), whereas non offshoring firms

acquire less managerial capital (hence, have lower firm productivity). Although reducing variable

offshoring costs leads to welfare polarization, it still improves aggregate welfare.

These results are generally consistent with empirical studies. The prediction that making immi-

grants more integrated to Home induces task upgrading of immigrant workers is consistent with

Ottaviano, Giovanni, and Wright (2013). The finding that immigration increases the set of entre-

preneurs enjoys support from Olney (2013) who finds that immigration has a positive impact on the

number of establishments in U.S. cities, and the effect is stronger among small establishments. The

prediction that immigration has a positive impact on productivity is supported by Peri (2012) who

shows that immigration does not crowd out employment of natives, while having a strong, positive

effect on productivity.

Barba Navaretti, Bertola, and Sembenelli (2008) find that offshoring is more prevalent among

larger and more productive firms in Italy. Similarly, using Chilean plant‐level data, Kasahara and

Lapham (2013) find that firms importing intermediate goods tend to be larger and more productive.

The finding that lowering variable offshoring costs leads to task upgrading of native workers and task

downgrading for immigrants in offshoring firms finds support from Ottaviano et al. (2013). The find-

ing that reducing offshoring costs induces firms to import more intermediate goods is consistent with

Goldberg, Khandelwal, Pavcnik, and Topalova (2010) who find that lower input tariffs increased new

input varieties in India. Using Hungarian firm‐level data, Halpern, Koren, and Sceidl (2015) find that

using more imported inputs increases firm productivity significantly.

This paper is related to recent literature that explores task trade introduced by Grossman and Rossi‐

Hansberg (2008). Egger, Kreickemeier, and Wrona (2015) present a monopolistic‐competition model

of trade with occupational choice and find that an exposure to offshoring may lead to a welfare loss.

Unel (2018) develops an offshoring model with occupational choice to study the impact of credit con-

straints on offshoring and unemployment.2

Relatively few papers have studied immigration and offshoring in a unified framework. Barba

Navaretti et al. (2008) develop a simple offshoring model to investigate the impact of offshoring on

native and immigrant workers using firm‐level data from Italy. They find that offshoring decreases

demand for native and immigrant workers. Olney (2012) develops a partial equilibrium model to

compare the impact of offshoring and immigration on wages of native U.S. workers, and finds that

offshoring has a more positive impact on low‐skilled wages than immigration. He assumes that

immigrants are identical to natives in performing tasks, and the supply of skilled and unskilled

workers is exogenously fixed. Mandelman and Zlate (2014) develop a stochastic growth model

where offshoring and immigration can jointly generate job polarization. Their model has two large

symmetric countries and a small country that is the source of unskilled immigrants. Furthermore,