Robots, Offshoring, and Welfare

The authors develop a simple but illuminating model that highlights the interaction between automation and offshoring. In the model, industrial robots might take over tasks formerly performed by domestic workers, but, in the presence of offshoring, they might instead displace foreign workers. This distinction proves to be critical for the wage and welfare effects of automation. In autarky, robots must, of course, displace domestic workers. Then, substituting robots for domestic labor in performing some tasks generates a productivity effect and a capital-deepening effect that tend to raise domestic wages, but a displacement effect that has the opposite impact on wages. In the presence of offshoring, if robots displace domestic workers, there is an additional terms-of-trade effect that adversely impacts the welfare of domestic workers. Domestic workers may suffer from automation in situations where they would have gained in autarky. In contrast, if robots displace foreign workers and thereby bring part of the production process back home, automation is always beneficial for domestic workers.