Fairness, Search Frictions, and O¤shoring1

Fairness considerations within the …rm are introduced into the determination of wages in a two factor Pissarides-style model of search unemployment to study its implications for the unemployment rates of unskilled and skilled workers in both the closed economy case and when the economy can o¤shore some inputs. While the e¤ect of a fair-wage constraint on unskilled workers takes the form of an increase in their wage and unemployment, we also …nd interesting e¤ects on skilled workers in a closed economy. The skilled wage and skilled unemployment move in directions opposite to each other, with the actual direction of their movement depending on the elasticity of substitution between skilled and unskilled labor. The impact of o¤shoring of the services of unskilled labor on the unemployment of unskilled workers is stronger in the presence of fairness considerations than in the case when search frictions are the only source of unemployment. Finally, o¤shoring insulates the skilled labor market outcomes from fairness concerns that are present in a closed economy. Key words: Fair wages, unemployment, overhiring e¤ect, o¤shoring JEL Classi…cation Codes: F16, F40, E24, J64 1We would like to thank seminar participants at UC-Riverside, University of Melbourne and University of New South Wales and conference participants at the Dallas Fed-SMU Conference on Globalization, Political Economy and Trade Policy held at Southern Methodist University for useful comments and suggestions. We are also indebted to Carl Davidson and John Leahy for very helpful comments on an earlier version. The standard disclaimer applies.