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Outsourcing, Unemployment and Welfare Policy

Christian Keuschnigg and Evelyn Ribi ()

University of St. Gallen Department of Economics working paper series 2007 from Department of Economics, University of St. Gallen

Abstract: Outsourcing of labor intensive activities challenges the welfare state and undermines the protection of low-skilled workers. The stylized facts are that profits are concentrated among the high-skilled, involuntary unemployment is mostly among the low-skilled, and private unemployment insurance is missing. This paper analyzes the effectiveness of redistribution and insurance policies when heterogeneous firms can outsource labor intensive components to low-wage economies. The main results are: (i) Social insurance props up wages, leading to more outsourcing and unskilled unemployment. (ii) Redistribution from the skilled to the working poor acts as a wage subsidy to unskilled workers, thereby reducing gross wages, outsourcing and unemployment. (iii) A trend to outsourcing, induced by lower transport costs of imported components, depresses low-skilled wages, raises unemployment, and boosts profits. The resulting polarization of society and the increased income risk of unskilled workers emphasize the social gains from redistribution and insurance and thus call for a more active role of the welfare state in more open economies.

Keywords: Outsourcing; unemployment; social insurance; redistribution (search for similar items in EconPapers)
JEL-codes: F23 H21 J64 J65 L23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias and nep-lab
Date: 2007-11
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Journal Article: Outsourcing, unemployment and welfare policy (2009) Downloads
Working Paper: Outsourcing, Unemployment and Welfare Policy (2008) Downloads
Working Paper: Outsourcing, Unemployment and Welfare Policy (2007) Downloads
Working Paper: Outsourcing, Unemployment and Welfare Policy (2007) Downloads
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