Outsourcing and Labor Taxation in Dual Labor Markets

Erkki Koskela and Panu Poutvaara

No 2333, CESifo Working Paper Series from CESifo

Abstract: We evaluate the effects of international outsourcing and labor taxation on wage formation and equilibrium unemployment in dual labor markets. Outsourcing promotes wage dispersion between the high-skilled and low-skilled workers. Higher domestic low-skilled wage tax, higher payroll tax and lower wage tax exemption increase optimal outsourcing. Outsourcing will reduce equilibrium unemployment of low-skilled workers both in the presence and absence of labor taxation. In the presence of outsourcing, wage tax, tax exemption and payroll tax have an ambiguous effect on equilibrium unemployment. Increasing the degree of tax progression decreases the wage rate and increases the demand of low-skilled workers.

Keywords: outsourcing; dual labor markets; labor taxation; equilibrium unemployment (search for similar items in EconPapers)
JEL-codes: E24 H22 J21 J31 J51 J82 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Outsourcing and Labor Taxation in Dual Labor Markets (2008)
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