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International Fragmentation: Boon or Bane for Domestic Employment?

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  • Hartmut Egger
  • Udo Kreickemeier

Abstract

In this paper, we introduce the fairness approach to efficiency wages into a standard model of international fragmentation. This gives us a theoretical framework in which wage inequality and unemployment rates are co-determined and therefore the public concern can be addressed that international fragmentation and outsourcing to low wage countries lead to domestic job-losses. We develop a novel diagrammatic tool to illustrate the main labour market effects of international fragmentation. We also explore how preferences for fair wages and the size of unemployment benefits govern the employment effects of outsourcing and critically assess the role of political intervention that aims to reduce unemployment benefits under internationally fragmented production.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1595.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1595

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Keywords: international fragmentation; unemployment; fair wages;

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  1. Egger, Hartmut & Falkinger, Josef, 2003. "The distributional effects of international outsourcing in a 2 x 2 production model," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 14(2), pages 189-206, August.
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  3. Kreickemeier, Udo & Nelson, Douglas, 2006. "Fair wages, unemployment and technological change in a global economy," Journal of International Economics, Elsevier, Elsevier, vol. 70(2), pages 451-469, December.
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  8. Hijzen, Alexander & Görg, Holger & Hine, Robert C., 2004. "International Outsourcing and the Skill Structure of Labour Demand in the United Kingdom," IZA Discussion Papers 1249, Institute for the Study of Labor (IZA).
  9. 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.
  10. Hartmut Egger & Udo Kreickemeier, 2005. "International Fragmentation: Boon or Bane for Domestic Employment?," CESifo Working Paper Series 1595, CESifo Group Munich.
  11. Ernst Fehr & Simon Gaechter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," CESifo Working Paper Series 336, CESifo Group Munich.
  12. Peter Howitt, 2002. "Looking Inside the Labor Market: A Review Article," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 40(1), pages 125-138, March.
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  15. Hartmut Egger & Peter Egger, 2001. "Market Concentration and International Outsourcing," WIFO Working Papers, WIFO 166, WIFO.
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  18. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(4), pages 543-69, November.
  19. Akerlof, George A & Yellen, Janet L, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(2), pages 255-83, May.
  20. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, Elsevier, vol. 1(1), pages 79-82.
  21. Robert Feenstra & Gordon Hanson, 2001. "Global Production Sharing and Rising Inequality: A Survey of Trade and Wages," NBER Working Papers 8372, National Bureau of Economic Research, Inc.
  22. Agell, Jonas & Lundborg, Per, 1995. "Fair Wages in the Open Economy," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 62(247), pages 335-51, August.
  23. Steven J. Matusz, 1994. "International Trade Policy in a Model of Unemployment and Wage Differentials," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 27(4), pages 939-49, November.
  24. Georg Kirchsteiger & Ernst Fehr & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," ULB Institutional Repository 2013/5927, ULB -- Universite Libre de Bruxelles.
  25. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(1), pages 106-134, February.
  26. Wilhelm Kohler, 2004. "International outsourcing and factor prices with multistage production," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 114(494), pages C166-C185, 03.
  27. Feenstra, Robert C & Hanson, Gordon H, 1996. "Globalization, Outsourcing, and Wage Inequality," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 240-45, May.
  28. Gaston, Noel, 2002. "The Effects of Globalisation on Unions and the Nature of Collective Bargaining," Journal of Economic Integration, Center for Economic Integration, Sejong University, Center for Economic Integration, Sejong University, vol. 17, pages 377-396.
  29. Hijzen, Alexander & Görg, Holger & Hine, Robert C., 2003. "International Fragmentation and Relative Wages in the UK," IZA Discussion Papers 717, Institute for the Study of Labor (IZA).
  30. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 433-44, June.
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  33. Hijzen, Alexander, 2003. "Fragmentation, Productivity and Relative Wages in the UK: A General Equilibrium Approach," Royal Economic Society Annual Conference 2003, Royal Economic Society 108, Royal Economic Society.
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