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Equilibrium Unemployment with Outsourcing under Labour Market Imperfections

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Author Info
Erkki Koskela () (University of Helsinki and IZA)
Rune Stenbacka () (Göteborg University and Swedish School of Economics, Helsinki)
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 importantly 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.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2628.

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Length: 21 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:iza:izadps:dp2628

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Related research
Keywords: outsourcing; labour market imperfections; equilibrium unemployment;

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
J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Amiti, Mary & Wei, Shang-Jin, 2004. "Fear of Outsourcing: Is It Justified?," CEPR Discussion Papers 4719, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Skaksen, Mette Yde & Sorensen, Jan Rose, 2001. "Should trade unions appreciate foreign direct investment," Journal of International Economics, Elsevier, vol. 55(2), pages 379-390, December. [Downloadable!] (restricted)
  3. 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:
  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!]
  5. Kjell Erik Lommerud & Frode Meland & Odd Rune Straume, 2005. "Can Deunionization Lead to International Outsourcing?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  6. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, December.
  7. 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.
    Other versions:
  8. Glass, Amy Jocelyn & Saggi, Kamal, 2001. "Innovation and wage effects of international outsourcing," European Economic Review, Elsevier, vol. 45(1), pages 67-86, January. [Downloadable!] (restricted)
  9. Jan Rose Skaksen, 2004. "International outsourcing when labour markets are unionized," Canadian Journal of Economics, Canadian Economics Association, vol. 37(1), pages 78-94, February. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Erkki Koskela & Rune Stenbacka, 2007. "Equilibrium Unemployment with Outsourcing and Wage Solidarity under Labour Market Imperfections," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Erkki Koskela & Rune Stenbacka, 2007. "Equilibrium Unemployment with Outsourcing and Wage Solidarity Under Labour Market Imperfections," IZA Discussion Papers 2733, Institute for the Study of Labor (IZA). [Downloadable!]
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