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Can Committed Profit Sharing Lower Flexible Outsourcing?

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  • Jan König
  • Erkki Koskela

Abstract

We analyze the impact of committed profit sharing for low-skilled workers on the amount of international outsourcing, if there is a bargaining between a firm and a labor union. In this bargaining round, the parties negotiate over the wage and provided effort. Here, we find that effort is independent of the bargaining power, profit sharing and wage. We further find that, in general, profit sharing leads to a substitution effect, which results in a decreased low-skilled wage and can therefore be an instrument to lower the demanded amount of outsourcing. For the optimal profit share, we find that it depends on the bargaining power of the union. The firm desists from such a remuneration scheme if the union is too strong. In contrast, if the firm is strong enough, the implementation becomes beneficial.

Suggested Citation

  • Jan König & Erkki Koskela, 2013. "Can Committed Profit Sharing Lower Flexible Outsourcing?," International Economic Journal, Taylor & Francis Journals, vol. 27(1), pages 79-95, March.
    • Handle: RePEc:taf:intecj:v:27:y:2013:i:1:p:79-95
    DOI: 10.1080/10168737.2012.658832
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    1. Philip Du Caju & Erwan Gautier & Daphne Momferatu & Melanie Ward-Warmedinger, 2009. "Institutional Features of Wage Bargaining in 23 European Countries, the US and Japan," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 12(2), pages 57-108, Winter.
    2. Douglas L. Kruse, 1993. "Does Profit Sharing Affect Productivity?," NBER Working Papers 4542, National Bureau of Economic Research, Inc.
    3. Sebastian Braun & Juliane Scheffel, 2007. "A Note on the Effect of Outsourcing on Union Wages," SFB 649 Discussion Papers SFB649DP2007-034, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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