Equilibrium unemployment with outsourcing under labour market imperfections

Abstract

We study both the various consequences and the incentives of outsourcing. We argue that the wage elasticity of labour demand is increasing as a function of the share of outsourcing, which is a result consistent with existing empirical research. Furthermore, we show that a production mode with a higher proportion of outsourcing activity reduces the negotiated wage in the high-wage country with an imperfectly competitive labour market so that outsourcing reduces equilibrium unemployment. Finally, we characterize the optimal production mode and show that stronger labour market imperfections lead to a production mode with a higher share of outsourcing.JEL Classification: E23, E24, J51, J64.

Does International Outsourcing Really Lower Workers’ Income?

“…A similar result is obtained by Koskela and Stenbacka (2009) in the model where profit sharing has not been analyzed.…”

“…The reason is that the used inputs are complements and thus for a given amount of outsourcing the loss of the labor union of a higher wage will decrease. However, there are also studies as Skaksen and Sorensen (2001) or Koskela and Stenbacka (2009) which show that the wage effect of foreign direct investments or outsourcing is a priori ambiguous. In Skaksen and Sorensen (2001) the degree of substitution between the activities in the home country and abroad is decisive for the domestic wage effect.…”

“…If the activities are good substitutes, than a lower domestic wage results and domestic employment lose, while a higher base wage occur for complementary activities and thus employment gains. In Koskela and Stenbacka (2009), the wage effect of outsourcing depends on the labor unions relative bargaining power, where it lowers (increases) the wage if the labor unions bargaining power sufficiently high (low).…”

North–South technology transfer in unionised multinationals

“…However, below we analyse the case where the minimum wage is set exactly at the equilibrium level given by (27), but wages are nevertheless treated as constant under the minimum wage. If incentives for technology transfer strictly increase in this case, we can conclude that the minimum wage can be somewhat above the equilibrium level without a¤ecting this result.…”

“…where w S is given by (27). Equivalently, the e¤ect of a binding minimum wage on incentives for product quality upgrading is given by…”