Outsourcing, Inequality and Aggregate Output

53 Pages Posted: 14 Jan 2021

See all articles by Adrien Bilal

Adrien Bilal

Princeton University

Hugo Lhuillier

affiliation not provided to SSRN

Date Written: December 19, 2020

Abstract

Outsourced workers experience large wage declines, yet domestic outsourcing may raise aggregate productivity. To study this equity-efficiency trade-off, we contribute a framework in which more productive firms either post higher wages along a job ladder to sustain a larger in-house workforce, comprised of many imperfectly substitutable worker types and subject to decreasing returns to scale, or rent labor services from contractors who hire in the same frictional labor markets. Three implications arise: more productive firms are more likely to outsource to save on higher wage premia; outsourcing raises output at the firm level; labor service providers endogenously locate at the bottom of the job ladder, implying that outsourced workers receive lower wages. Using firm-level instruments for outsourcing and revenue productivity, we find empirical support for all three predictions in French administrative data. After structurally estimating the model, we show that the rise in outsourcing in France between 1997 and 2007 increased aggregate output by 1% and reduced the labor share by 3 percentage points.

Suggested Citation

Bilal, Adrien and Lhuillier, Hugo, Outsourcing, Inequality and Aggregate Output (December 19, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-05, Available at SSRN: https://ssrn.com/abstract=3765873 or http://dx.doi.org/10.2139/ssrn.3765873

Adrien Bilal (Contact Author)

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

Hugo Lhuillier

affiliation not provided to SSRN

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