Equilibrium Unemployment with Outsourcing Under Labour Market Imperfections

Koskela, Erkki; Stenbacka, Rune

doi:10.2139/ssrn.969688

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Equilibrium Unemployment with Outsourcing Under Labour Market Imperfections

IZA Discussion Paper No. 2628

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

There 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: 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 or http://dx.doi.org/10.2139/ssrn.969688