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Flexible Outsourcing and the Impacts of Labour Taxation in European Welfare States

Author

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  • Koskela, Erkki

    (University of Helsinki)

  • Poutvaara, Panu

    (University of Munich)

Abstract

In European Welfare States, unskilled workers are typically unionized, while the wage formation of skilled workers is more competitive. To focus on this aspect, we analyze how flexible international outsourcing and labour taxation affect wage formation, employment and welfare in dual domestic labour markets. Higher productivity of outsourcing, lower cost of outsourcing and lower factor price of outsourcing increase wage dispersion between the skilled and unskilled workers. Increasing wage tax progression of unskilled workers decreases the wage rate and increases the labour demand of unskilled workers. It decreases the welfare of unskilled workers and increases both the welfare of skilled workers and the profit of firms.

Suggested Citation

  • Koskela, Erkki & Poutvaara, Panu, 2008. "Flexible Outsourcing and the Impacts of Labour Taxation in European Welfare States," IZA Discussion Papers 3699, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp3699
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    References listed on IDEAS

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    Cited by:

    1. Jan König & Erkki Koskela, 2013. "The Role of Profit Sharing in Dual Labour Markets with Flexible Outsourcing," LABOUR, CEIS, vol. 27(4), pages 351-370, December.
    2. Koskela, Erkki & König, Jan, 2009. "Can Profit Sharing Lower Flexible Outsourcing? A Note," IZA Discussion Papers 4063, Institute of Labor Economics (IZA).
    3. Erkki Koskela & Jan König, 2008. "Flexible Outsourcing, Profit Sharing and Equilibrium Unemployment," CESifo Working Paper Series 2382, CESifo.
    4. Aronsson, Thomas & Koskela, Erkki, 2008. "Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment," Umeå Economic Studies 759, Umeå University, Department of Economics.

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    More about this item

    Keywords

    flexible outsourcing; dual labour market; impacts of labour taxation; welfare state;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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