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Equilibrium Unemployment with Outsourcing under Labour Market Imperfections

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  • Koskela, Erkki

    () (University of Helsinki)

  • Stenbacka, Rune

    () (Swedish School of Economics)

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    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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    File URL: http://ftp.iza.org/dp2628.pdf
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    Bibliographic 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:
    Publication status: published in: Labour Economics, 2009, 16 (3), 284-290
    Handle: RePEc:iza:izadps:dp2628

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    Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
    Phone: +49 228 3894 223
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    Web page: http://www.iza.org

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    Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
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    Related research

    Keywords: labour market imperfections; equilibrium unemployment; outsourcing;

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    References

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    1. 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.
    2. Nickell, S. & Layard, R., 1997. "Labour Market Institutions and Economic Performance," Papers 23, Centre for Economic Performance & Institute of Economics.
    3. 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.
    4. Hans-Werner Sinn, 2011. "Introduction," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 12(3), pages 09-17, December.
    5. 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.
    6. Lommerud, Kjell Erik & Meland, Frode & Straume, Odd Rune, 2006. "Can deunionization lead to international outsourcing?," Discussion Papers, Research Unit: Market Processes and Governance SP II 2006-23, Social Science Research Center Berlin (WZB).
    7. Amiti, Mary & Wei, Shang-Jin, 2004. "Fear of Outsourcing: Is It Justified?," CEPR Discussion Papers 4719, C.E.P.R. Discussion Papers.
    8. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x.
    9. Glass, Amy Jocelyn & Saggi, Kamal, 2001. "Innovation and wage effects of international outsourcing," European Economic Review, Elsevier, vol. 45(1), pages 67-86, January.
    10. 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.
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    Cited by:
    1. Erkki Koskela & Rune Stenbacka, 2007. "Equilibrium Unemployment with Outsourcing and Wage Solidarity under Labour Market Imperfections," CESifo Working Paper Series 1988, CESifo Group Munich.
    2. Koskela, Erkki & Stenbacka, Rune, 2007. "Equilibrium Unemployment with Outsourcing and Wage Solidarity Under Labour Market Imperfections," IZA Discussion Papers 2733, Institute for the Study of Labor (IZA).

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