Spillovers Across Labor Markets in Search Models: E¤ects of Animal Spiritsand O¤shoring1

We study the e¤ects of additional distortions or shocks, such as a fair-wage constraint and/or the possibility of o¤shoring unskilled jobs, in a two-factor general equilibrium model of unemployment with search frictions. While the direct point of impact of such shocks is on unskilled workers, we also …nd interesting indirect spillover e¤ects on skilled workers. A binding fair-wage constraint increases the unskilled unemployment rate and can at the same time lead to a higher unemployment rate and a lower wage for skilled workers, as compared to an equilibrium where fairness considerations are absent or non-binding. Introducing o¤shoring of unskilled jobs in our search model always leads to an increase in skilled wage, a decrease in skilled unemployment and an increase in unskilled unemployment. Also, o¤shoring makes it more likely that the fair-wage constraint binds. Key words: Fair wages, unemployment, strategic e¤ect, o¤shoring JEL Classi…cation Codes: E24, F16, F41 We 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.