Wage Fairness in a Subcontracted Labor Market

43 Pages Posted: 23 Sep 2019

See all articles by Arnab K. Basu

Arnab K. Basu

College of William and Mary - Department of Economics

Nancy H. Chau

Cornell University - School of Applied Economics and Management; IZA Institute of Labor Economics

Vidhya Soundararajan

Indian Institute of Management (IIMB), Bangalore

Abstract

Labor market subcontracting is a global phenomenon. This paper presents a theory of wage fairness in a subcontracted labor market, where workers confront multi-party employment relationships and deep wage inequities between regular and subcontractor-mediated hires. We show that subcontracting derives its appeal from a downward revision of workers' fair wage demand when producers delegate employment decisions down the supply chain. Furthermore, subcontracting creates a holdup problem, resulting in wages that workers deem unfair, along with adverse worker morale consequences in equilibrium. These insights reveal the efficiency costs of subcontracting as an employer strategy to redress workers' demand for fair wages.

Keywords: subcontracting, wage fairness

JEL Classification: J41, J48, O43

Suggested Citation

Basu, Arnab K. and Chau, Nancy H. and Soundararajan, Vidhya, Wage Fairness in a Subcontracted Labor Market. IZA Discussion Paper No. 12609, Available at SSRN: https://ssrn.com/abstract=3457653

Arnab K. Basu (Contact Author)

College of William and Mary - Department of Economics ( email )

Williamsburg, VA 23187-8795
United States
757-221-1318 (Phone)
757-221-1175 (Fax)

HOME PAGE: http://faculty.wm.edu/akbasu/

Nancy H. Chau

Cornell University - School of Applied Economics and Management ( email )

Ithaca, NY 14853
United States
607-255-4463 (Phone)
607-255-9984 (Fax)

IZA Institute of Labor Economics

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

Vidhya Soundararajan

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

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