Unemployment and welfare consequences of international outsourcing under monopolistic competition

This paper challenges the conventional academic view that international outsourcing is just another form of gainful trade. Contrary to that view, we show that labourservice outsourcing can reduce the highwage country's welfare even when productmarket trade is beneficial, within a model that combines involuntary unemployment and monopolistic competition. Outsourcing's impact on welfare is worsened by a definite loss of jobs and a possible contraction in the range of varieties produced worldwide. While owners of capital benefit from outsourcing under certain conditions, labour's welfare always falls.