Fair Wages and Foreign Sourcing

Date Published:

Abstract:

We develop a simple general equilibrium model for studying the impact of workers’relative-wage concerns on resource allocation and the organization of production. We characterize equilibria for the closed economy and for an open economy in which an intermediate input can be produced o¤shore. In the closed economy, …firms that are otherwise identical may have different hiring practices and pay different wages to low-skill workers. In the open economy, some …firms perform all production at home while others produce all of the intermediate input offshore. We show that relative-wage concerns add to incentives for offshoring. Offshore production may take place in the presence of relative-wage concerns in situations where it would not be pro…table in their absence. And if offshoring takes place with or without such concerns, the extent of offshore production is greater in the former setting than in the latter. We further show that when workers are concerned about relative pay, the equilibrium does not maximize the economy’s net output. Nonetheless, the competitive equilibrium with o¤shoring is constrained Pareto efficient.