Working Paper: NBER ID: w14856
Authors: Thomas J. Holmes; Julia Thornton Snider
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: No keywords provided
JEL Codes: J31; L22; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in outsourcing (L24) | decreases in wage payments (J33) |
| decrease in outsourcing friction (L24) | increases in outsourcing (L24) |
| increases in outsourcing (L24) | decline in wages (J31) |
| higher labor share (D33) | more elastic demand for labor (J29) |
| increases in outsourcing (L24) | self-reinforcing cycle of wage declines (J31) |
| wages for capital-intensive tasks (J39) | increases (O42) |
| overall effect of outsourcing on labor-intensive tasks (F66) | negative (Y70) |
| wage reductions (J38) | contribute to outsourcing decisions (L24) |