Working Paper: NBER ID: w29348
Authors: Adrien Bilal; Hugo Lhuillier
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. Three implications arise. First, selection into outsourcing: more productive firms are more likely to outsource to save on labor costs and higher wage premia. Second, a productivity effect: outsourcing leads firms to raise output and labor demand. Third, an outsourcing wage penalty: contractor firms pay lower wages. We find support for all three implications in French administrative data and rule out alternative explanations. Instrumenting revenue productivity using export demand shocks, we find evidence for selection into outsourcing. Instrumenting outsourcing using variation in occupational exposure, we find evidence for the productivity effect. We confirm the outsourcing wage penalty with a movers design. After structurally estimating the model and validating it against our reduced-form estimates, we find that the rise in outsourcing in France between 1997 and 2016 lowers low skill service worker earnings and welfare by 1.5%. Outsourcing increases labor market sorting, lowers the share of rents going to workers, but raises aggregate output by 6%. A simultaneous 5.5% minimum wage hike stabilizes earnings and maintains employment and output gains.
Keywords: outsourcing; inequality; aggregate output; labor markets
JEL Codes: E24; E25; E64; F12; J24; J31; J42; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Outsourcing (L24) | Decline in low-skill service worker earnings (J31) |
| Outsourcing (L24) | Increase in aggregate output (E23) |
| More productive firms (D21) | More likely to outsource (L24) |
| Outsourcing (L24) | Increase in output and labor demand (J23) |
| Contractor firms (L74) | Pay lower wages (J39) |