A Theory of Outsourcing and Wage Decline

Thomas Holmes () and Julia Thornton Snider

No 14856, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: J31 L22 L23 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-bec and nep-lab
Note: PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as 5 "A Theory of Outsourcing and Wage Decline." American Economic Journal: Microeconomics , 3(2), May 2011: 38–59, with Julia Thornton Snider

Downloads: (external link)
http://www.nber.org/papers/w14856.pdf (application/pdf)

Related works:
Working Paper: A theory of outsourcing and wage decline (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:14856

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w14856

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().