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Outsourcing of Unionized Firms and the Impact of Labor Market Policy Reforms

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Author Info
Koskela, Erkki () (University of Helsinki)
Schöb, Ronnie () (Free University of Berlin)

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Abstract

This paper shows that outsourcing of parts of workforce in unionized firms leads to wage moderation both in the case of strategic and flexible outsourcing and as long as the share of the outsourced workforce is not too large, this wage-moderation effect on domestic employment outweighs the direct substitution effect so that domestic employment increases in unionized firms as outsourcing costs fall. With respect the impact of labor tax reforms that are well-established in the literature: changes in the wage tax rate, the tax exemption and the unemployment benefit payments affect domestic wage setting in the same way as in the absence of outsourcing. Furthermore, increasing the degree of tax progression by keeping the relative tax burden per worker constant continues to be good for employment. However, except for low outsourcing activities, the impact of these policy measures will become smaller as outsourcing costs fall.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3566.

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Length: 29 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:iza:izadps:dp3566

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Related research
Keywords: outsourcing; union wage-setting; employment; labor tax reform;

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Find related papers by JEL classification:
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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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. 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)
  2. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August. [Downloadable!] (restricted)
  3. 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!]
  4. Leahy, Dermot & Montagna, Catia, 2000. "Unionisation and Foreign Direct Investment: Challenging Conventional Wisdom?," Economic Journal, Royal Economic Society, vol. 110(462), pages C80-92, March. [Downloadable!] (restricted)
    Other versions:
  5. Hartmut Egger & Peter Egger, 2000. "Outsourcing and skill-specific employment in a small economy: Austria and the fall of the Iron Curtain," Economics working papers 2000-24, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
  6. Koskela, Erkki & Schob, Ronnie, 1999. "Does the composition of wage and payroll taxes matter under Nash bargaining?," Economics Letters, Elsevier, vol. 64(3), pages 343-349, September. [Downloadable!] (restricted)
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  7. Hans-Werner Sinn, 2007. "The Welfare State and the Forces of Globalization," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  8. Slaughter, Matthew J., 2001. "International trade and labor-demand elasticities," Journal of International Economics, Elsevier, vol. 54(1), pages 27-56, June. [Downloadable!] (restricted)
  9. Robert C. Feenstra & Gordon H. Hanson, 1999. "The Impact Of Outsourcing And High-Technology Capital On Wages: Estimates For The United States, 1979-1990," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 907-940, August. [Downloadable!] (restricted)
  10. 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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  11. Gorg, Holger & Hanley, Aoife, 2005. "Labour demand effects of international outsourcing: Evidence from plant-level data," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 365-376. [Downloadable!] (restricted)
  12. Alexander Hijzen & Holger Görg & Robert C. Hine, 2004. "International Outsourcing and the Skill Structure of Labour Demand in the United Kingdom," Discussion Papers of DIW Berlin 437, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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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 & Jan König, 2008. "Flexible Outsourcing, Profit Sharing and Equilibrium Unemployment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Erkki Koskela & Panu Poutvaara, 2008. "Flexible Outsourcing and the Impacts of Labour Taxation in European Welfare States," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Aronsson, Thomas & Koskela, Erkki, 2009. "Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment," IZA Discussion Papers 4196, Institute for the Study of Labor (IZA). [Downloadable!]
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