Equilibrium Unemployment with Outsourcing Under Labour Market Imperfections
21 Pages Posted: 12 Mar 2007
Date Written: February 2007
We study both the various consequences and the incentives of outsourcing. We argue that the wage elasticity of labour demand is increasing as a function of the share of outsourcing, which is importantly 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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