A Theory of Outsourcing and Wage Decline / Thomas J. Holmes, Julia Thornton Snider.

Format:

Book

Author/Creator:

Holmes, Thomas J.

Contributor:

National Bureau of Economic Research.

Thornton Snider, Julia.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14856.

NBER working paper series no. w14856

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

We develop a theory of outsourcing in which there is market power in one factor market (labor) and no market power in a second factor market (capital). There are two intermediate goods: one labor-intensive and the other capital-intensive. We show there is always outsourcing in the market allocation when a friction limiting outsourcing is not too big. The key factor underlying the result is that labor demand is more elastic, the greater the labor share. Integrated plants pay higher wages than the specialist producers of labor-intensive intermediates. We derive conditions under which there are multiple equilibria that vary in the degree of outsourcing. Across these equilibria, wages are lower the greater the degree of outsourcing. Wages fall when outsourcing increases in response to a decline in the outsourcing friction.

Notes:

Print version record

April 2009.