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Equilibrium Unemployment with Outsourcing and Wage Solidarity 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 evaluate the effects of outsourcing and wage solidarity on wage formation and equilibrium unemployment in a heterogeneous labour market, where wages are determined by a monopoly labour union. We find that outsourcing promotes the wage dispersion between the high-skilled and low-skilled workers. When the labour union adopts a solidaristic wage policy, it will magnify, and not dampen, this tendency. Further, higher outsourcing will increase equilibrium unemployment among the high-skilled workers, whereas it will reduce it among the low-skilled workers. Overall, outsourcing will reduce economy-wide equilibrium unemployment under the reasonable condition that the proportion of high-skilled workers is sufficiently low.

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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2733.

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    Length: 35 pages
    Date of creation: Apr 2007
    Date of revision:
    Publication status: published in: European Economic Review, 2010, 54 (3), 376-392
    Handle: RePEc:iza:izadps:dp2733

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    Related research

    Keywords: outsourcing; wage solidarity; labour market imperfections; equilibrium unemployment;

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