Fair Wages and Foreign Sourcing

We develop a simple general equilibrium model for studying the impact of workersrelative-wage concerns on resource allocation and the organization of production. We characterize equi-libria for the closed economy and for an open economy in which an intermediate input can be produced o¤shore. In the closed economy, \u85 rms that are otherwise identical may have di¤erent hiring practices and pay di¤erent wages to low-skill workers. In the open economy, some \u85rms perform all production at home while others produce all of the intermediate input o¤shore. We show that relative-wage concerns add to incentives for o¤shoring. O¤shore production may take place in the presence of relative-wage concerns in situations where it would not be pro\u85table in their absence. And if o¤shoring takes place with or without such concerns, the extent of o¤-shore 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 economys net output. Nonetheless, the competitive equilibrium with o¤shoring is constrained Pareto e ¢ cient