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Strategic Outsourcing, Profit Sharing and Equilibrium Unemployment

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Author Info
Koskela, Erkki () (University of Helsinki)
König, Jan () (Free University of Berlin)
Abstract

We analyze the following questions associated with outsourcing and profit sharing under imperfect labour markets. How does strategic outsourcing influence wage formation, profit sharing and employee effort when firms commit to optimal profit sharing before wage formation or decide for profit sharing after wage formation? What is the relationship between outsourcing, profit sharing, and equilibrium unemployment when profit sharing is also a part of a compensation scheme in all industries? We find that if firms will decide on profit sharing before the wage formation, higher outsourcing decreases wage whereas profit sharing has an ambiguous effect. Under flexible profit sharing wage is smaller than in the case of committed profit sharing. For equilibrium unemployment, we find that if there is also profit sharing in other industries, the effects of outsourcing and profit sharing on the unemployment rate is ambiguous both in the committed and flexible case.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3413.

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Length: 36 pages
Date of creation: Mar 2008
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Handle: RePEc:iza:izadps:dp3413

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Related research
Keywords: outsourcing; profit sharing; labour market imperfection; employee effort; 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
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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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. 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)
    Other versions:
  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. Erkki Koskela & Rune Stenbacka, 2006. "Flexible and Committed Profit Sharing with Wage Bargaining: Implications for Equilibrium Unemployment," Journal of Economics, Springer, vol. 87(2), pages 159-180, 03. [Downloadable!] (restricted)
  4. 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)
  5. 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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  6. 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)
  7. Slaughter, Matthew J., 2001. "International trade and labor-demand elasticities," Journal of International Economics, Elsevier, vol. 54(1), pages 27-56, June. [Downloadable!] (restricted)
  8. 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)
  9. 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)
    Other versions:
  10. 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)
    Other versions:
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