Equilibrium Unemployment with Outsourcing Under Labour Market Imperfections

21 Pages Posted: 12 Mar 2007

See all articles by Erkki Koskela

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Rune Stenbacka

Hanken School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 2007

Abstract

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

Suggested Citation

Koskela, Erkki and Stenbacka, Rune, Equilibrium Unemployment with Outsourcing Under Labour Market Imperfections (February 2007). IZA Discussion Paper No. 2628. Available at SSRN: https://ssrn.com/abstract=969688

Erkki Koskela (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

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FIN-00014 Helsinki
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CESifo (Center for Economic Studies and Ifo Institute)

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Bank of Finland - Research Department ( email )

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IZA Institute of Labor Economics

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Rune Stenbacka

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+35 89 4313 3433 (Phone)
+35 89 4313 3382 (Fax)

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