International Outsourcing and Unemployment in a Minimum‐Wage Economy

To explore the impact of international outsourcing on unemployment and social welfare, the conventional trade model is extended by including both economies of scale and a minimum‐wage constraint in the unskilled‐labor market. In the paper, the scale economies are linked with the production of the most skill‐intensive good. It is shown that within such a framework, there is a trade‐off between a more socially desirable endowment allocation and a greater level of employment. Therefore, even though outsourcing could raise aggregate employment, this benefit is at the cost of further exacerbating the resource misallocation. In this way, the extensions to the traditional framework explored in the paper generate new insights as to why outsourcing may cause a net welfare loss to the home country.