Flexible Outsourcing and the Impacts of Labour Taxation in European Welfare States

37 Pages Posted: 14 Sep 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

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Abstract

In European Welfare States, unskilled workers are typically unionized, while the wage formation of skilled workers is more competitive. To focus on this aspect, we analyze how flexible international outsourcing and labour taxation affect wage formation, employment and welfare in dual domestic labour markets. Higher productivity of outsourcing, lower cost of outsourcing and lower factor price of outsourcing increase wage dispersion between the skilled and unskilled workers. Increasing wage tax progression of unskilled workers decreases the wage rate and increases the labour demand of unskilled workers. It decreases the welfare of unskilled workers and increases both the welfare of skilled workers and the profit of firms.

Keywords: flexible outsourcing, dual labour market, impacts of labour taxation, welfare state

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

Suggested Citation

Koskela, Erkki and Poutvaara, Panu, Flexible Outsourcing and the Impacts of Labour Taxation in European Welfare States. IZA Discussion Paper No. 3699. Available at SSRN: https://ssrn.com/abstract=1267840 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Erkki Koskela (Contact Author)

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

P.O. Box 54
FIN-00014 Helsinki
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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

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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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