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Flexible Outsourcing, Profit Sharing and Equilibrium Unemployment

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Author Info
Erkki Koskela ()
Jan König ()
Abstract

We analyze the questions associated with flexible outsourcing both with committed and flexible profit sharing under imperfect domestic labour markets. How does profit sharing influence flexible outsourcing? What is the relationship between outsourcing cost, profit sharing and equilibrium unemployment, when profit sharing is also a part of the compensation schemes in other industries? In the case of committed profit sharing, outsourcing cost increases wage. Optimal flexible profit sharing is smaller than in the absence of outsourcing, but outsourcing cost and wage will have ambiguous effect on optimal flexible profit sharing. Implementing profit sharing can help to avoid outsourcing due to a direct productivity effect and a wage effect. For equilibrium unemployment the effects of outsourcing cost and profit sharing are ambiguous both in case of committed and flexible profit sharing. In the case of zero effort elasticity there is no committed or flexible profit sharing in the absence or presence of outsourcing and in this case lower outsourcing cost will decrease unemployment.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2382.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2382

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Related research
Keywords: flexible outsourcing; profit sharing; labour market imperfection; employee effort; equilibrium unemployment;

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Find related papers by JEL classification:
E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
J82 - Labor and Demographic Economics - - Labor Standards - - - Labor Force Composition

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  1. Sandra E. Black & Lisa M. Lynch, 2000. "What's Driving the New Economy: The Benefits of Workplace Innovation," NBER Working Papers 7479, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier. [Downloadable!] (restricted)
    Other versions:
  3. Cable, John & Wilson, Nicholas, 1990. "Profit-Sharing and Productivity: Some Further Evidence," Economic Journal, Royal Economic Society, vol. 100(401), pages 550-55, June. [Downloadable!] (restricted)
  4. Mine Zeynep Senses, 2006. "The Effects of Outsourcing on the Elasticity of Labor Demand," Working Papers 06-07, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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  8. Jean-Pierre DANTHINE & Jennifer HUNT, 1992. "Wage Bargaining Structure, Employment and Economic Integration," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9204, Université de Lausanne, Faculté des HEC, DEEP.
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  9. Hans-Werner Sinn, 2007. "The Welfare State and the Forces of Globalization," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  10. Martin J. Conyon & Richard B. Freeman, 2001. "Shared Modes of Compensation and Firm Performance: UK Evidence," NBER Working Papers 8448, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Slaughter, Matthew J., 2001. "International trade and labor-demand elasticities," Journal of International Economics, Elsevier, vol. 54(1), pages 27-56, June. [Downloadable!] (restricted)
  12. Koskela, Erkki & Poutvaara, Panu, 2008. "Flexible Outsourcing and the Impacts of Labour Taxation in European Welfare States," IZA Discussion Papers 3699, Institute for the Study of Labor (IZA). [Downloadable!]
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  13. Booth, Alison L & Frank, Jeff, 1999. "Earnings, Productivity, and Performance-Related Pay," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 447-63, July. [Downloadable!] (restricted)
  14. Kruse, Douglas L, 1992. "Profit Sharing and Productivity: Microeconomic Evidence from the United States," Economic Journal, Royal Economic Society, vol. 102(410), pages 24-36, January. [Downloadable!] (restricted)
  15. Rana Hasan & Devashish Mitra & K.V. Ramaswamy, 2003. "Trade Reforms, Labor Regulations and Labor-Demand Elasticities: Empirical Evidence from India," NBER Working Papers 9879, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Jakob Roland Munch & Jan Rose Skaksen, 2005. "Specialization, Outsourcing and Wages," Discussion Papers 05-28, University of Copenhagen. Department of Economics. [Downloadable!]
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  17. Erkki Koskela & Ronnie Schöb, 2008. "Outsourcing of Unionized Firms and the Impacts of Labour Market Policy Reforms," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  18. Mary Amiti & Shang-Jin Wei, 2004. "Fear of Service Outsourcing: Is it Justified?," IMF Working Papers 04/186, International Monetary Fund. [Downloadable!]
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  19. Cahuc, Pierre & Dormont, Brigitte, 1997. "Profit-sharing: Does it increase productivity and employment? A theoretical model and empirical evidence on French micro data," Labour Economics, Elsevier, vol. 4(3), pages 293-319, September. [Downloadable!] (restricted)
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