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An evaluation of the employment effects of barriers to outsourcing

Author

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  • Subhayu Bandyopadhyay
  • Sugata Marjit
  • Lei Yang

Abstract

Barriers to outsourcing that are being currently implemented in the US effectively tax its companies who “export” jobs through outsourcing. The objective is to raise domestic employment. Given that many of the important international markets where the US has a comparative advantage feature non-atomistic firms, we evaluate the implications of such policies in an oligopolistic context. We find that while an outsourcing tax favors domestic workers by causing firms to switch to a greater use of domestic sources (the substitution effect), the loss in international competitiveness has a negative volume effect (the output effect), which pulls in the other direction. First, we identify the conditions that determine the relative strengths of these effects, which inform us about the conditions under which such a tax achieves its stated objective. Next, we consider the international policy interdependence that arises when a competing nation also engages in such a policy. An interesting finding is that even if a unilateral tax by the US raises its employment, this may turn around in a Nash policy equilibrium, where the competing nation abandons free trade and also engages in unilateral outsourcing policies. Finally, we extend the basic model to look at the effects of credit shortage and product differentiation. Interesting findings are that both a credit crisis (as in recent years) and increased product differentiation tend to worsen the employment effects of the outsourcing tax. The qualitative nature of our findings is similar between Cournot and Bertrand competition, suggesting that our results are robust to the mode of strategic behavior.

Suggested Citation

  • Subhayu Bandyopadhyay & Sugata Marjit & Lei Yang, 2010. "An evaluation of the employment effects of barriers to outsourcing," Working Papers 2010-030, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2010-030
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    1. Roy Chowdhury, Prabal, 2009. "Bertrand competition with non-rigid capacity constraints," Economics Letters, Elsevier, vol. 103(1), pages 55-58, April.
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    Cited by:

    1. Sugata Marjit & Arijit Mukherjee & Lei Yang, 2016. "Sustainabnility of Product Market Collusion under Credit Market Imperfections," CESifo Working Paper Series 6292, CESifo Group Munich.
    2. Simontini Das & Ajitava Raychaudhuri & Saikat Sinha Roy, 2012. "Immigration Versus Outsourcing: A Developing Country¡¯S View," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 37(2), pages 109-138, June.

    More about this item

    Keywords

    Contracting out ; Taxation ; Labor market;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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