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Outsourcing, Unemployment and Welfare Policy

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  • Christian Keuschnigg

    ()

  • Evelyn Ribi

    ()

Abstract

Outsourcing of labor intensive activities challenges the welfare state and undermines the protection of low-skilled workers. The stylized facts are that profits are concentrated among the high-skilled, involuntary unemployment is mostly among the low-skilled, and private unemployment insurance is missing. This paper analyzes the effectiveness of redistribution and insurance policies when heterogeneous firms can outsource labor intensive components to low-wage economies. The main results are: (i) Social insurance props up wages, leading to more outsourcing and unskilled unemployment. (ii) Redistribution from the skilled to the working poor acts as a wage subsidy to unskilled workers, thereby reducing gross wages, outsourcing and unemployment. (iii) A trend to outsourcing, induced by lower transport costs of imported components, depresses low-skilled wages, raises unemployment, and boosts profits. The resulting polarization of society and the increased income risk of unskilled workers emphasize the social gains from redistribution and insurance and thus call for a more active role of the welfare state in more open economies.

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Bibliographic Info

Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2007 with number 2007-41.

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Length: 41 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:usg:dp2007:2007-41

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Keywords: Outsourcing; unemployment; social insurance; redistribution;

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Citations

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Cited by:
  1. Christian Keuschnigg & Michael P. Devereux, 2009. "The Distorting Arm's Length Principle," University of St. Gallen Department of Economics working paper series 2009 2009-20, Department of Economics, University of St. Gallen.
  2. Silvia Rocha-Akis, 2012. "The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market," CESifo Working Paper Series 3739, CESifo Group Munich.
  3. Christian Keuschnigg, 2008. "Corporate Taxation and the Welfare State," University of St. Gallen Department of Economics working paper series 2008 2008-18, Department of Economics, University of St. Gallen.
  4. Keuschnigg, Christian & Loretz, Simon & Winner, Hannes, 2014. "Tax Competition and Tax Coordination in the European Union: A Survey," Working Papers in Economics and Finance 2014-4, University of Salzburg.
  5. Wilhelm Kohler & Jens Wrona, 2010. "Offshoring Tasks, yet Creating Jobs?," CESifo Working Paper Series 3019, CESifo Group Munich.
  6. Torben M. Andersen & Allan Sørensen, 2010. "Globalization, tax distortions and public sector retrenchment," Economics Working Papers 2010-09, School of Economics and Management, University of Aarhus.
  7. Christian Keuschnigg, 2009. "The Role of Corporate Taxation in a Large Welfare State," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 145(IV), pages 443-452, December.
  8. Kohler, Wilhelm & Wrona, Jens, 2011. "Offshoring tasks, yet creating jobs?," University of Tuebingen Working Papers in Economics and Finance 12, University of Tuebingen, Faculty of Economics and Social Sciences.
  9. Silvia Rocha‐Akis & Ronnie Schöb, 2011. "Welfare Policy in the Presence of Unionised Labour and Internationally Mobile Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(1), pages 93-119, 03.
  10. Luis Carvalho & Aurora A.C. Teixeira, 2011. "Where are the poor in International Economics?," FEP Working Papers 425, Universidade do Porto, Faculdade de Economia do Porto.
  11. Alexandre SIMONS, 2014. "Delocation, home wages and welfare," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2014007, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  12. Thomas Aronsson & Erkki Koskela, 2008. "Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment," CESifo Working Paper Series 2481, CESifo Group Munich.
  13. Evelyn Ribi, 2009. "Optimal Size and Intensity of Job Search Assistance Programs," University of St. Gallen Department of Economics working paper series 2009 2009-19, Department of Economics, University of St. Gallen.
  14. Thede, Susanna, 2012. "A Simple Model of Trade, Job Task Offshoring and Social Insurance," Working Papers 2012:16, Lund University, Department of Economics.
  15. Victor-Adrian Troacă,Victor Troacă, 2012. "Outsourcing – Is It A Solution For The State?," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 187-189, March.

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