Outsourcing and Labor Taxation in Dual Labor Markets

46 Pages Posted: 7 Jul 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

Panu Poutvaara

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 2008

Abstract

We evaluate the effects of international outsourcing and labor taxation on wage formation and equilibrium unemployment in dual labor markets. Outsourcing promotes wage dispersion between the high-skilled and low-skilled workers. Higher domestic low-skilled wage tax, higher payroll tax and lower wage tax exemption increase optimal outsourcing. Outsourcing will reduce equilibrium unemployment of low-skilled workers both in the presence and absence of labor taxation. In the presence of outsourcing, wage tax, tax exemption and payroll tax have an ambiguous effect on equilibrium unemployment. Increasing the degree of tax progression decreases the wage rate and increases the demand of low-skilled workers.

Keywords: outsourcing, dual labor markets, labor taxation, equilibrium unemployment

JEL Classification: E24, J21, J31, J51, J82, H22

Suggested Citation

Koskela, Erkki and Poutvaara, Panu, Outsourcing and Labor Taxation in Dual Labor Markets (June 2008). CESifo Working Paper Series No. 2333. Available at SSRN: https://ssrn.com/abstract=1156269

Erkki Koskela (Contact Author)

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

P.O. Box 54
FIN-00014 Helsinki
Finland
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CESifo (Center for Economic Studies and Ifo Institute)

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Bank of Finland - Research Department ( email )

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IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Panu Poutvaara

University of Helsinki - Department of Economics ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

HOME PAGE: http://www.valt.helsinki.fi/blogs/poutvaar/

Helsinki Center of Economic Research (HECER) ( email )

FI-00014 Helsinki
Finland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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