The Reallocation Effects of Domestic Outsourcing

Mayara Felix and Michael Wong
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Mayara Felix: Yale University
Michael Wong: The University of Hong Kong

No 2416, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper estimates the wage, employment, and reallocation effects of non-core activity outsourcing using BrazilÕs unexpected 1993 court-ordered outsourcing legalization. We leverage North-South variation in pre-legalization court permissiveness and compare security guards to less affected occupations. We find that older incumbent security guards were adversely impacted through occupational layoffs, loss of firm-level wage premia, and exit from the occupation. At the same time, increased numbers of younger workers entered the formal sector and became employed at contract firms. On net, legalization increased guard employment by 5%, led by a 50% increase in employment for guards aged 18-24, and had no effect on demographically-adjusted guard wages. The observed labor reallocation effects are explained by the fact that contract firms persistently employ demographically different workers than direct employers.

Pages: 95 pages
Date: 2024-08
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