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Outsourcing, Unemployment and Welfare Policy

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Author Info
Christian Keuschnigg ()
Evelyn Ribi ()

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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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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
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Handle: RePEc:usg:dp2007:2007-41

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Related research
Keywords: Outsourcing; unemployment; social insurance; redistribution;

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Find related papers by JEL classification:
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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References listed on IDEAS
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Full references

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. Michael P. Devereux & Christian Keuschnigg, 2009. "The Distorting Arm’s Length Principle," Working Papers 0910, Oxford University Centre for Business Taxation. [Downloadable!]
    Other versions:
  2. Christian Keuschnigg, 2009. "The Role of Corporate Taxation in a Large Welfare State," University of St. Gallen Department of Economics working paper series 2009 2009-23, Department of Economics, University of St. Gallen. [Downloadable!]
  3. Christian Keuschnigg, 2009. "Corporate Taxation and the Welfare State," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  4. 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. [Downloadable!]
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