Welfare Policy in the Presence of Unionised Labour and Internationally Mobile Firms

38 Pages Posted: 4 May 2010

See all articles by Silvia Rocha-Akis

Silvia Rocha-Akis

Vienna University of Economics and Business - Department of Economics

Ronnie Schöb

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

Date Written: April 2010

Abstract

In oligopolistic industries, increased cost saving opportunities via offshoring have a moderating effect on trade unions. In order to discourage mobile firms from leaving the country, unions accept lower sector wages. In effect, the negotiated wage becomes independent of workers’ bargaining power and their domestic outside opportunities. Hence, wage moderation - induced by deeper economic integration - creates leeway for the government to engage in redistributive policies even if this improves the workers’ outside options. Only if the latter become sufficiently attractive will redistribution induce some offshoring, and it is only at that level that further economic integration will lead to both wage moderation and offshoring activities. Therefore, our analysis suggests that rather than provoking a downsizing of the welfare state, offshoring defines an upper limit for the generosity of the welfare state below which redistribution becomes less instead of more distortive.

Keywords: offshoring, import competition, wage bargaining, oligopoly, redistribution

JEL Classification: F16, H30, H50, J30, J50, L10

Suggested Citation

Rocha-Akis, Silvia and Schöb, Ronnie, Welfare Policy in the Presence of Unionised Labour and Internationally Mobile Firms (April 2010). CESifo Working Paper Series No. 3032. Available at SSRN: https://ssrn.com/abstract=1599411

Silvia Rocha-Akis

Vienna University of Economics and Business - Department of Economics ( email )

Augasse 2-6
A-1090 Wien
Austria

Ronnie Schöb (Contact Author)

Freie Universitaet Berlin ( email )

Boltzmannstraße 20
Berlin, Berlin 14195
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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