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Outsourcing, Unemployment and Welfare Policy

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  • Christian Keuschnigg

    () (University of St. Gallen (IFF-HSG), CEPR and CESifo)

  • Evelyn Ribi

    () (University of St. Gallen (IFF-HSG))

Abstract

Outsourcing of labor intensive activities challenges the welfare state and undermines the protection of low-skilled workers. The stylized facts are that profits are concentrated among the high-skilled, involuntary unemployment is mostly among the low-skilled, and private unemployment insurance is missing. This paper analyzes the effectiveness of redistribution and insurance policies when heterogeneous firms can outsource labor intensive components to low-wage economies. The main results are: (i) Social insurance props up wages, leading to more outsourcing and unskilled unemployment. (ii) Redistribution from the skilled to the working poor acts as a wage subsidy to unskilled workers, thereby reducing gross wages, outsourcing and unemployment. (iii) A trend to outsourcing, induced by lower transport costs of imported components, depresses low-skilled wages, raises unemployment, and boosts profits. The resulting polarization of society and the increased income risk of unskilled workers emphasizes the social gains from redistribution and insurance and thus calls for a more active role of the welfare state in more open economies.

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Bibliographic Info

Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 0720.

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Date of creation: 2007
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Handle: RePEc:btx:wpaper:0720

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Keywords: Outsourcing; unemployment; social insurance; redistribution;

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Citations

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Cited by:
  1. Silvia Rocha‐Akis & Ronnie Schöb, 2011. "Welfare Policy in the Presence of Unionised Labour and Internationally Mobile Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(1), pages 93-119, 03.
  2. Michael P. Devereux & Christian Keuschnigg, 2009. "The Distorting Arm’s Length Principle," Working Papers 0910, Oxford University Centre for Business Taxation.
  3. Thomas Aronsson & Erkki Koskela, 2008. "Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment," CESifo Working Paper Series 2481, CESifo Group Munich.
  4. Christian Keuschnigg, 2009. "Corporate Taxation and the Welfare State," CESifo Working Paper Series 2557, CESifo Group Munich.
  5. Luis Carvalho & Aurora A.C. Teixeira, 2011. "Where are the poor in International Economics?," FEP Working Papers 425, Universidade do Porto, Faculdade de Economia do Porto.
  6. Evelyn Ribi, 2009. "Optimal Size and Intensity of Job Search Assistance Programs," University of St. Gallen Department of Economics working paper series 2009 2009-19, Department of Economics, University of St. Gallen.
  7. Kohler, Wilhelm & Wrona, Jens, 2011. "Offshoring tasks, yet creating jobs?," University of Tuebingen Working Papers in Economics and Finance 12, University of Tuebingen, Faculty of Economics and Social Sciences.
  8. Torben M. Andersen & Allan Sørensen, 2012. "Globalization, Tax Distortions, and Public-Sector Retrenchment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 409-439, 06.
  9. 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.
  10. Wilhelm Kohler & Jens Wrona, 2010. "Offshoring Tasks, yet Creating Jobs?," CESifo Working Paper Series 3019, CESifo Group Munich.
  11. Christian Keuschnigg, 2009. "The Role of Corporate Taxation in a Large Welfare State," University of St. Gallen Department of Economics working paper series 2009 2009-23, Department of Economics, University of St. Gallen.
  12. Victor-Adrian Troacă,Victor Troacă, 2012. "Outsourcing – Is It A Solution For The State?," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 187-189, March.

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