5 Sensitivity Analysis
5.2 How General a Result is Equilibrium Mismatch?
Our main results illustrate the importance of whether or not mismatch is a feature of the post-liberalization equilibrium for how the labor market adjusts to o¤shoring. Implicit is the fact that in our baseline parameterization both EPS (no mismatch) and CSM (mismatch) equilibrium are feasible. How general a result is the coexistence of both types of equilibria under trade?
Fig. 3 o¤ers some perspective on this. Holding constant all other parameters, the …gure varies the share of o¤shored production in the high-tech good, , along the x-axis and the parameter governing the substitutability of Northern and Southern high-skilled inputs, , along the y-axis. Every point on the grid evaluates the conditions presented in Section 5.2 that tell us whether CSM equilibrium can obtain alongside EPS equilibrium.
part of the parameter space in which both EPS and CSM equilibria coexist. The unshaded (smaller) region to the right denotes that part of the parameter space where mismatch cannot be supported in a trade equilibrium. Finally, the black line denotes that baseline share parameterization of = 0:9: The baseline substitutability parameter has such that Northern and Southern high-skilled inputs are strong complements in the multinational’s production function, putting the baseline model in a part of the parameter space where both equilibria coexist and mismatch is feasible.
What is interesting about Fig. 3 is that an empirically relevant parameterization is one in which the share of o¤shored production is relatively small, so that 0:9 < 1 (see, for instance, Burstein, Kurtz, and Tesar (2008) and Arseneau and Leduc (2012)). Within that range, mismatch only exists as an equilibrium outcome when domestic and foreign high-skilled inputs are su¢ciently complementary. While our parameterization of
satis-…es this criteria, there is considerable uncertainty regarding whether o¤shored production should be viewed as a complement to or a substitute for domestic inputs. Fig. 1 suggests that if one believes the inputs are substitutes (or mild complements with a su¢ciently low share of o¤shore activity), the labor market implications of o¤shoring could be much larger because mismatch will not arise to help cushion the labor market e¤ects following a trade liberalization.
6 Conclusion
We study the role of mismatch in the adjustment of the labor market to a trade liberalization that results in o¤shoring of high-tech production. Our results suggest that mismatch helps to mitigate the negative labor market consequences that arise from o¤shoring. The ability to reallocate domestic high-skilled labor across both high- and low-tech industries dampens the increase in the unemployment rate as well as the decline in wages that result from shifting domestic production abroad. Our analysis also reveals that under our calibration the size of the parameter space over which mismatch can arise as an equilibrium outcome is, in fact, quite limited. Indeed, as long as the share of the o¤shored production is not too large, high-skilled workers will only choose to accept jobs with low-tech …rms if domestic and o¤shore
high-tech production are su¢ciently complementary.
In general, we view the limited subset of the parameters space in which mismatch can arise as an equilibrium outcome as a limitation of the model presented in this paper. in order to bring a calibrated version of the model more in line with observed data, the model needs to be extended in a way that makes mismatch a more attractive proposition to both workers and …rms following trade reform. We pursue two such extensions in companion work. Arse-neau and Epstein (2014b) introduces on-the-job search to the partial equilibrium framework presented here, while Arseneau and Epstein (2014c) extends this modeling framework to a general equilibrium open economy setting with endogenous directed search.
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Table 1Baseline Calibration at Monthly Frequency
North South
Production Parameters
2.45 Multinational technology parameter: ZH -0.99 Multinational share of domestic input: --41.75 Multinational substitutability parameter: -1.60 Low-tech …nal goods technology: ZL,ZL 0.60 1.00 High-tech intermediate production technology: zL, zL 1.00 1.00 Low-tech intermediate production technology: zL,zL 1.00 1.05 Mismatch intermediate production technology: zM
-Labor-Market, Population Parameters, and Other
0.004 Interest rater, r 0.004
0.50 Share of low skill individuals: , 0.80
0.50 Worker bargaining power: , 0.50
0.36 Flow unemployment bene…ts: b, b 0.03
0.73 Vacancy and job maintenance ‡ow cost: c, c 0.47
0.03 Job destruction rate: , 0.01
0.50 Elasticity of matches with respect to vacancies: , 0.50
0.87 Matching e¢ciency: A, A 0.44
Table 2Baseline Comparisons of Autarky and Trade
World Economic Environment A. Autarky B. Trade C. Trade
Benchmark Benchmark Alternative
Country North South North South North South
Equilibrium Con…guration EPS CSM CSM EPS EPS EPS
1 Price of intermediate high-tech (pH, pO) 2.445 - 1.800 0.652 1.119 1.362 2 Price of intermediate low-tech (pL, pL) 1.600 0.600 1.600 0.600 1.600 0.600
3 Aggregate vacancies (v, v ) 0.077 0.012 0.039 0.020 0.036 0.036
4 Aggregate unemployment rate (u,u ) 0.079 0.058 0.058 0.100 0.364 0.095
5 High-tech vacancies (vH, vO) 0.049 0.000 0.014 0.007 0.003 0.022
6 Low-tech vacancies (vL,vL) 0.028 0.012 0.025 0.013 0.033 0.014
7 High-skill unemp. rate (uH=(1 ),uH=(1 )) 0.059 0.058 0.046 0.150 0.606 0.070 8 High-skill mismatch rate (eM=(1 uH), eM=(1 uH)) 0.000 1.000 0.634 0.000 0.000 0.000 9 Low-skill unemp. rate (uL= , uL= ) 0.099 0.058 0.070 0.087 0.121 0.101 10 Wage: high-skill in high-tech (wH,wH) 1.636 - 1.007 0.161 0.381 0.825
11 Wage: mismatch (wM,wM) - 0.144 0.950 - -
-12 Average wage of high-skill (wH, wH) 1.636 0.144 0.971 0.161 0.381 0.825 13 Wage: low-skill in low-tech (wL, wL) 0.824 0.127 0.837 0.123 0.814 0.122
14 Aggregate wage (W, W ) 1.238 0.130 0.905 0.130 0.680 0.266
33
Fig. 1 Sensitivity of labor market outcomes to share of o¤shoring in multinational produc-tion funcproduc-tion
Fig. 2Sensitivity of labor market outcomes to input substitutability parameter in multina-tional production function
Fig. 3 Existence of CSM and EPS equilibria (substitutability and share of o¤shoring)