Outsourcing of Unionized Firms and the Impacts of Labour Market Policy Reforms

32 Pages Posted: 19 Aug 2008

See all articles by Erkki Koskela

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Ronnie Schöb

CESifo (Center for Economic Studies and Ifo Institute); Freie Universitaet Berlin

Date Written: July 2008

Abstract

This paper shows that outsourcing of parts of the workforce in unionized firms leads to wage moderation and as long as the share of the outsourced workforce is not too large, this wage moderation effect on domestic employment outweighs the direct substitution effect so that domestic employment increases in unionized firms as outsourcing costs fall. This does not affect the well-established qualitative results of the impact labour tax reforms have: changes in the wage tax rate, the tax exemption and the unemployment benefit payments affect domestic wage setting in the same way as in the absence of outsourcing. Furthermore, increasing the degree of tax progression by keeping the relative tax burden per worker constant continues to be good for employment. However, except for low outsourcing activities, the impact of these policy measures will become smaller as outsourcing costs fall.

Keywords: outsourcing, union wage-setting, employment, labour tax reform

JEL Classification: J41, J51, H22

Suggested Citation

Koskela, Erkki and Schöb, Ronnie and Schöb, Ronnie, Outsourcing of Unionized Firms and the Impacts of Labour Market Policy Reforms (July 2008). CESifo Working Paper Series No. 2360, Available at SSRN: https://ssrn.com/abstract=1190994 or http://dx.doi.org/10.2139/ssrn.1190994

Erkki Koskela (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

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Bank of Finland - Research Department ( email )

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IZA Institute of Labor Economics

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Ronnie Schöb

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

Freie Universitaet Berlin ( email )

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Berlin, Berlin 14195
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