Equilibrium Unemployment with Outsourcing under Labour Market Imperfections
CESifo, Munich, 2007
CESifo Working Paper No. 1892
![](https://cesifo.org/DocImg/cesifo1_wp1892.jpg?c=1689237044)
We study the various consequences of and the incentives for outsourcing. We argue that the wage elasticity of labour demand increases as a function of the share of outsourcing, which is a result consistent with existing empirical research. Furthermore, we show that a production mode with a higher proportion of outsourcing activity reduces the negotiated wage in the high-wage country with an imperfectly competitive labour market so that outsourcing reduces equilibrium unemployment. Finally, we characterize the optimal production mode and show that stronger labour market imperfections lead to a production mode with a higher share of outsourcing.
Labour Markets