Outsourcing, Inequality and Aggregate Output

Adrien Bilal and Hugo Lhuillier

No 19985, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Outsourced workers experience large wage declines, yet domestic outsourcing may raise aggregate productivity. To study this equity-efficiency trade-off, we contribute a framework in which multi-worker firms either hire imperfectly substitutable worker types in-house along a wage ladder, or rent labor services from contractors who hire in the same frictional labor markets. More productive firms select into outsourcing to save on labor costs and higher wage premia. Outsourcing leads firms to raise output and labor demand. Contractor firms pay lower wages. We find reduced-form support for all three implications in French administrative data, instrumenting revenue productivity with export demand shocks and outsourcing costs using variation in occupational exposure. After proving identification and structurally estimating the model, we find that the emergence of outsourcing in France lowers low skill service worker earnings and welfare by 3.1% but raises aggregate output by 1.8%.

JEL-codes: E24 E25 E64 F12 J24 J31 J42 O40 (search for similar items in EconPapers)
Date: 2025-02
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