Abstract
The purpose of this paper is to study the role of social insurance design in a comparative-advantage model of offshoring and trade. To do so, we incorporate social insurance into a modified version of the Grossman and Rossi-Hansberg (Am Econ Rev 98(5):1978–1997, 2008) model by formalizing its administrative, compensation, cost, labor-supply and productivity effects. The compensation and productivity effects, which are novel, give rise to important offshoring and trade implications that can contribute to explain how social insurance provision can be sustained under globalization pressure and why similar globalization pressure can lead to different skill premia developments in Western economies.
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Notes
See e.g. Baldwin (2006).
The model outlines generally applicable factors affecting long-run equilibria without adding complexities inherent in the implementation of particular systems (linked to, for example, financing channels and insurance risk),
For historical reasons, social insurance systems in Western countries include unemployment, health and/or pension insurance. Since this paper’s scope is to investigate static mechanisms linking social insurance to offshoring and trade and the static impact of pension insurance is to increase insurance costs (that are otherwise accounted for in the model), it is left out from the analysis.
Katz (1986), Raff and Summers (1986) and Levine (1992) show that a downward wage boundary can give rise to high-productivity employment. Acemoglu and Shimer (2000) and Marimon and Zilibotti (1999) show that unemployment insurance can uphold high-productivity employment by improving employer-employee matching.
Grossman and Rossi-Hansberg (2008) identify this effect in a setting where all industries offshore the same range of tasks. Prior formal evidence showing that offshoring in the labor-intensive industry may benefit low-skill workers include Jones and Kierskowski (1990, 2001), Arndt (1997), Egger and Falkinger (2003) and Kohler (2004a, b).
It should be noted that this is consistent with the workings of traditional trade-theoretic settings as the difference lies in the wage and unit labor cost discrepancy.
For example, a recent adult skill survey performed by the OECD shows that low-skill persons are much more likely to have health problems in Western economies (OECD 2013).
This setup resembles traditional trade settings where the labor supply function is vertical at the full employment level.
The specification can easily be extended to include additional costs of social insurance provision without altering the model’s qualitative outcomes.
Offshoring costs can comprise any relocation cost such as legal, search and negotiation costs incurred from establishing new production networks and transmit/transport costs of the task’s output.
Note that this expression, which relies on the assumption of international labor-productivity differences, contrasts to that specified by Grossman and Rossi-Hansberg (2008) for international technology differences (since firms use their own technology).
These expressions differ from those of adjusted factor-price equalization in the underlying model (Grossman and Rossi-Hansberg 2008, pp. 1989) in that insurance surcharges and insurance-induced productivity differences are included instead of inherent technology differences.
In line with the paper’s scope of illustrating standard trade-theoretic effects, we rule out the extreme scenario that the terms-of-trade effects triggered by altered production opportunities are strong enough to overturn the welfare gains (costs) of output expansion (contraction).
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Acknowledgements
Financial support from the Swedish Social Insurance Agency is gratefully acknowledged. The author thanks an anonymous referee for detailed improvement recommendations and Andreas Bergh, Eric Bond, Ian Coxhead, Uwe Fachinger, Fredrik Heyman, Henrik Horn, Agneta Kruse and Fredrik Sjöholm for valuable comments. The paper has benefited from helpful suggestions of seminar participants at Department of Economics, Lund University, Research Institute of Industrial Economics, Stockholm and School of Business and Economics, RWTH Aachen University and fruitful discussions with participants at the ‘European Economic Integration: Present and Future Challenges’ Workshop in Lisbon and the ‘Globalization: Strategies and Effects’ conference in Koldingfjord.
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Thede, S. A model of trade, task offshoring and social insurance. Int Econ Econ Policy 15, 787–802 (2018). https://doi.org/10.1007/s10368-018-0415-9
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DOI: https://doi.org/10.1007/s10368-018-0415-9