Offshore production, labor migration and the macroeconomy

In my doctoral dissertation, I examine theoretical and empirical questions related to the international macroeconomic effects of offshore production, labor migration and remittances.;In Chapter 1, "Offshore Production and Business Cycle Dynamics with Heterogeneous Firms," I analyze the cross-country transmission of business cycles when firms relocate production abroad at locations with relatively lower labor costs, an action which I refer to as offshoring. In the model, I distinguish between fluctuations in the number of firms producing offshore (the extensive margin) and the value added per offshoring firm (the intensive margin) as separate transmission mechanisms. Firms are heterogeneous in labor productivity; they face a sunk entry cost in the domestic market and an additional fixed cost to produce offshore. The incentive to relocate production abroad increases with the difference between the domestic and foreign cost of effective labor, and with firm-specific productivity. The key results are: (1) The model replicates the procyclical pattern of offshoring, as well as the extensive and intensive margin dynamics that I document using data from Mexico's maquiladora sector; (2) Offshoring enhances the co-movement of output between the countries involved; and (3) Offshoring reduces price dispersion across countries, because it dampens the real exchange rate appreciation that follows a productivity increase in the parent country.;In Chapter 2, "Offshore Production to Mexico: The Intensive and Extensive Margin Responses to U.S. Technology Shocks," I estimate the conditional correlations and impulse responses of three indicators of offshoring to Mexico (total value added, value added per plant, and the number of plants) associated with U.S. permanent technology shocks. Using data from U.S. manufacturing and Mexico's maquiladora sector, I identify U.S. permanent technology shocks in an open-economy, structural VAR model with long-run restrictions. I find that: (1) Offshore production in Mexico exhibits an immediate increase along its intensive margin (value added per plant) in response to a positive U.S. technology shock, but returns to its initial level over time. In contrast, the extensive margin (the number of plants) does not adjust on impact, but increases gradually over time and stabilizes at a permanently higher level. (2) In the presence of country-specific technology shocks, the model of offshoring with heterogeneous firms in Chapter 1 matches qualitatively the business cycle dynamics of offshoring from the U.S. to Mexico.;In Chapter 3, "Immigration and the Macroeconomy" (co-authored with Federico Mandelman), we analyze the dynamics of labor migration and the insurance role of remittances in a two-country, real business cycle framework. Emigration increases with the expected stream of future wage gains, and is dampened by the sunk cost reflecting the intensity of border enforcement. During booms in the destination economy, the scarcity of established immigrants lessens capital accumulation, and enhances the volatility of the immigrant wage and remittances. The welfare gain from the inflow of unskilled labor increases with the complementarity between skilled and unskilled labor, and with the share of the skilled among native labor. The model matches the cyclical dynamics of both the unskilled immigration into the U.S. and remittances sent back to Mexico.