The Trouble with Offshoring: Static and Dynamic Losses in the Presence of Unemployment

This study provides theoretical support for the popular objection to offshoring, whereby firms at home employ services of labour located abroad. In the presence of unemployment, our analysis highlights welfare losses from offshoring – not only for the static case of a fixed stock of capital, but also for the dynamic one of optimal saving and investment. We compare these static and dynamic losses to the gains that would instead arise under full‐employment conditions, assumed by most of the theoretical literature on offshoring. Our results suggest that public concerns over offshoring are justified when unemployment is taken explicitly into account.