Equilibrium Unemployment with Outsourcing Under Labour Market Imperfections
24 Pages Posted: 29 Jan 2007
Date Written: January 2007
We study the various consequences of and the incentives for outsourcing. We argue that the wage elasticity of labour demand increases as a function of the share of outsourcing, which is a result consistent with existing empirical research. Furthermore, we show that a production mode with a higher proportion of outsourcing activity reduces the negotiated wage in the high-wage country with an imperfectly competitive labour market so that outsourcing reduces equilibrium unemployment. Finally, we characterize the optimal production mode and show that stronger labour market imperfections lead to a production mode with a higher share of outsourcing.
Keywords: outsourcing, labour market imperfections, equilibrium unemployment
JEL Classification: E23, E24, J51, J64
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