Variation in labor skills and offshoring across time zones

Abstract

AbstractWe check the role of time‐zone difference on offshoring of service tasks when the skill of labors varies between the partner countries. We frame a model where partner countries are located in non‐overlapping time zones, and the skill level of the partner‐country labors is lower. In our model, service production is divided into two sequential stages, and output is a supermodular function of the skill of labors and time. The problem of the producers is to choose between domestic production and offshoring. Domestic production employs high‐skill labors though the time management is inefficient. On the other hand, offshoring to a non‐overlapping time zone helps to work round the clock and reduce the cost, but the lower expertise of skilled labor lowers the output. In such a framework, we check conditions for beneficial offshoring. The condition derived in our analysis provides combinations of skill and time that can make offshoring beneficial. Results show that offshoring across time zones is beneficial even when the complexity of stages of production vary. However, only the relatively less‐critical task is offshored. We further find that availability of domestic low‐skill labor does not benefit the firm, while foreign low‐skill labor may be beneficially utilized through time‐zone exploitation.