A theory of outsourcing and wage decline

Thomas Holmes () and Julia Thornton Snider

No 669, Working Papers from Federal Reserve Bank of Minneapolis

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.

Keywords: Labor unions; Wages (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-bec and nep-lab
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Citations: View citations in EconPapers (2)

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Working Paper: A Theory of Outsourcing and Wage Decline (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:669

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