Outsourcing, Unemployment and Welfare Policy

University of St. Gallen, Department of Economics, Discussion Paper No. 2007-41

41 Pages Posted: 25 Nov 2007

See all articles by Christian Keuschnigg

Christian Keuschnigg

University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Evelyn Ribi

University of St. Gallen

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Date Written: November 2007

Abstract

Outsourcing of labor intensive activities challenges the welfare state and undermines the protection of low-skilled workers. The stylized facts are that profits are concentrated among the high-skilled, involuntary unemployment is mostly among the low-skilled, and private unemployment insurance is missing. This paper analyzes the effectiveness of redistribution and insurance policies when heterogeneous firms can outsource labor intensive components to low-wage economies. The main results are: (i) Social insurance props up wages, leading to more outsourcing and unskilled unemployment. (ii) Redistribution from the skilled to the working poor acts as a wage subsidy to unskilled workers, thereby reducing gross wages, outsourcing and unemployment. (iii) A trend to outsourcing, induced by lower transport costs of imported components, depresses low-skilled wages, raises unemployment, and boosts profits. The resulting polarization of society and the increased income risk of unskilled workers emphasize the social gains from redistribution and insurance and thus call for a more active role of the welfare state in more open economies.

Keywords: Outsourcing, unemployment, social insurance, redistribution

JEL Classification: F23, H21, J64, J65, L23

Suggested Citation

Keuschnigg, Christian and Ribi, Evelyn, Outsourcing, Unemployment and Welfare Policy (November 2007). University of St. Gallen, Department of Economics, Discussion Paper No. 2007-41. Available at SSRN: https://ssrn.com/abstract=1031857 or http://dx.doi.org/10.2139/ssrn.1031857

Christian Keuschnigg (Contact Author)

University of St. Gallen – Department of Economics (FGN-HSG) ( email )

Varnbuelstrasse 19
St. Gallen, 9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Evelyn Ribi

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

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