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The Role of Profit Sharing in a Dual Labour Market with Flexible Outsourcing

Author

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  • Koskela, Erkki

    () (University of Helsinki)

  • König, Jan

    () (Free University of Berlin)

Abstract

We analyze the following questions associated with flexible outsourcing under partly imperfect dual domestic labour markets, where high skilled workers participate in firm's profit via profit sharing: How does the implementation of profit sharing influence flexible outsourcing? What is the relationship between outsourcing cost, profit sharing and wages? We show that profit sharing has a positive effect on low skilled wage and thus an outsourcing enhancing character. The wages of both types of labour are negatively correlated and lower outsourcing cost can increase the wage dispersion by decreasing the low skilled wage and raising the high skilled wage. The overall effect of profit sharing on high skilled wage is ambiguous due to a positive direct effect and a negative indirect effect via the low skilled wage.

Suggested Citation

  • Koskela, Erkki & König, Jan, 2008. "The Role of Profit Sharing in a Dual Labour Market with Flexible Outsourcing," IZA Discussion Papers 3876, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp3876
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    Keywords

    profit sharing; dual labour market; flexible outsourcing; labour market imperfection; employee effort;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J82 - Labor and Demographic Economics - - Labor Standards - - - Labor Force Composition

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