Equilibrium Unemployment with Outsourcing and Wage Solidarity Under Labour Market Imperfections
38 Pages Posted: 26 Apr 2007
Date Written: May 2007
We evaluate the effects of outsourcing and wage solidarity on wage formation and equilibrium unemployment in a heterogeneous labour market, where wages are determined by a monopoly labour union. We find that outsourcing promotes the wage dispersion between the high-skilled and low-skilled workers. When the labour union adopts a solidaristic wage policy, it will magnify, and not dampen, this tendency. Further, higher outsourcing will increase equilibrium unemployment among the high-skilled workers, whereas it will reduce it among the low-skilled workers. Overall, outsourcing will reduce economy-wide equilibrium unemployment under the reasonable condition that the proportion of high-skilled workers is sufficiently low.
Keywords: outsourcing, wage solidarity, labour market imperfections, equilibrium unemployment
JEL Classification: E23, E24, J31, J51
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