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Equilibrium Unemployment with Outsourcing and Wage Solidarity under Labour Market Imperfections

  • Erkki Koskela
  • Rune Stenbacka
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    We evaluate the effects of outsourcing and wage solidarity on wage formation and equilibrium unemployment in a heterogeneous labour market, where wages are determined by a monopoly labour union. We find that outsourcing promotes the wage dispersion between the high-skilled and low-skilled workers. When the labour union adopts a solidaristic wage policy, it will magnify, and not dampen, this tendency. Further, higher outsourcing will increase equilibrium unemployment among the high-skilled workers, whereas it will reduce it among the low-skilled workers. Overall, outsourcing will reduce economy-wide equilibrium unemployment under the reasonable condition that the proportion of high-skilled workers is sufficiently low.

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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1988.

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    Date of creation: 2007
    Date of revision:
    Handle: RePEc:ces:ceswps:_1988
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