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Outsourcing of Unionized Firms and the Impact of Labor Market Policy Reforms

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  • Erkki Koskela
  • Ronnie Schöb

Abstract

This paper shows that outsourcing of parts of the workforce in unionized firms leads to wage moderation both in the case of strategic and flexible outsourcing. As long as the share of the outsourced workforce is not too large, this wage-moderation effect on domestic employment outweighs the direct substitution effect so that domestic employment increases in unionized firms as outsourcing costs fall. With respect to the impact of labor tax reform changes in the wage tax rate, the tax exemption and the unemployment benefit payments affect domestic wage setting in the same way as in the absence of outsourcing. Furthermore, increasing the degree of tax progression by keeping the relative tax burden per worker constant continues to be good for employment. However, except for low outsourcing activities, the impact of these policy measures will become smaller as outsourcing costs fall. Copyright � 2010 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 18 (2010)
Issue (Month): 4 (09)
Pages: 682-695

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Handle: RePEc:bla:reviec:v:18:y:2010:i:4:p:682-695

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References

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  1. Alexander Hijzen & Holger Görg & Robert C. Hine, 2004. "International Outsourcing and the Skill Structure of Labour Demand in the United Kingdom," Discussion Papers of DIW Berlin 437, DIW Berlin, German Institute for Economic Research.
  2. Erkki Koskela & Ronnie Schöb, 1999. "Does the Composition of Wage and Payroll Taxes Matter Under Nash Bargaining?," Discussion Papers, Government Institute for Economic Research Finland (VATT) 203, Government Institute for Economic Research Finland (VATT).
  3. Slaughter, Matthew J., 2001. "International trade and labor-demand elasticities," Journal of International Economics, Elsevier, Elsevier, vol. 54(1), pages 27-56, June.
  4. Stefanova Boyka M, 2006. "The Political Economy of Outsourcing in the European Union and the East-European Enlargement," Business and Politics, De Gruyter, De Gruyter, vol. 8(2), pages 1-45, August.
  5. Gorg, Holger & Hanley, Aoife, 2005. "Labour demand effects of international outsourcing: Evidence from plant-level data," International Review of Economics & Finance, Elsevier, Elsevier, vol. 14(3), pages 365-376.
  6. Leahy, Dermot & Montagna, Catia, 2000. "Unionisation and Foreign Direct Investment: Challenging Conventional Wisdom?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(462), pages C80-92, March.
  7. Hartmut Egger & Peter Egger, 2000. "Outsourcing and skill-specific employment in a small economy: Austria and the fall of the Iron Curtain," Economics working papers, Department of Economics, Johannes Kepler University Linz, Austria 2000-24, Department of Economics, Johannes Kepler University Linz, Austria.
  8. Rana Hasan & Devashish Mitra & K.V. Ramaswamy, 2003. "Trade Reforms, Labor Regulations and Labor-Demand Elasticities: Empirical Evidence from India," Economics Study Area Working Papers, East-West Center, Economics Study Area 59, East-West Center, Economics Study Area.
  9. Mine Zeynep Senses, 2006. "The Effects of Outsourcing on the Elasticity of Labor Demand," Working Papers, Center for Economic Studies, U.S. Census Bureau 06-07, Center for Economic Studies, U.S. Census Bureau.
  10. Hans-Werner Sinn, 2007. "The Welfare State and the Forces of Globalization," NBER Working Papers 12946, National Bureau of Economic Research, Inc.
  11. Robert C. Feenstra & Gordon H. Hanson, 1999. "The Impact Of Outsourcing And High-Technology Capital On Wages: Estimates For The United States, 1979-1990," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(3), pages 907-940, August.
  12. Jan Rose Skaksen, 2004. "International outsourcing when labour markets are unionized," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 37(1), pages 78-94, February.
  13. Mary Amiti & Shang-Jin Wei, 2004. "Fear of Service Outsourcing," IMF Working Papers 04/186, International Monetary Fund.
  14. Skaksen, Mette Yde & Sorensen, Jan Rose, 2001. "Should trade unions appreciate foreign direct investment," Journal of International Economics, Elsevier, Elsevier, vol. 55(2), pages 379-390, December.
  15. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, Elsevier, vol. 3(1), pages 65-80, August.
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Citations

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Cited by:
  1. Silvia Rocha-Akis, 2012. "The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market," CESifo Working Paper Series 3739, CESifo Group Munich.
  2. Koskela, Erkki & König, Jan, 2011. "The Role of Profit Sharing in Dual Labour Markets with Flexible Outsourcing," IZA Discussion Papers 5798, Institute for the Study of Labor (IZA).
  3. Stephanie Meinhard & Niklas Potrafke, 2012. "The Globalization–Welfare State Nexus Reconsidered," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 20(2), pages 271-287, 05.
  4. Elisabetta Magnani, 2012. "Vertical disintegration and training: evidence from a matched employer–employee survey," Journal of Productivity Analysis, Springer, Springer, vol. 38(2), pages 199-217, October.
  5. Koskela, Erkki, 2009. "Impacts of Labor Taxation with Perfectly and Imperfectly Competitive Domestic Labor Markets under Flexible Outsourcing," IZA Discussion Papers 4544, Institute for the Study of Labor (IZA).
  6. Erkki Koskela & Panu Poutvaara, 2008. "Flexible Outsourcing and the Impacts of Labour Taxation in European Welfare States," CESifo Working Paper Series 2440, CESifo Group Munich.
  7. Aronsson, Thomas & Koskela, Erkki, 2009. "Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment," IZA Discussion Papers 4196, Institute for the Study of Labor (IZA).
  8. Koskela, Erkki, 2010. "Analysis of Labor Tax Progression under Heterogeneous Domestic Labor Markets and Flexible Outsourcing," IZA Discussion Papers 5313, Institute for the Study of Labor (IZA).
  9. Jan König & Erkki Koskela, 2011. "Does International Outsourcing Really Lower Workers’ Income?," Journal of Labor Research, Springer, Springer, vol. 32(1), pages 21-38, March.
  10. Maiti, Dibyendu & Mukherjee, Arijit, 2013. "Trade cost reduction, subcontracting and unionised wage," Labour Economics, Elsevier, Elsevier, vol. 21(C), pages 103-110.

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