A Theory of Outsourcing and Wage Decline
American Economic Journal: Microeconomics
vol. 3,
no. 2, May 2011
(pp. 38-59)
Abstract
This paper develops a theory of outsourcing in which the circumstances under which factors of production can grab rents play the leading role. One factor has monopoly power (call this labor) while a second factor does not (call this capital). There are two kinds of production tasks: labor-intensive and capital-intensive. We show that if frictions limiting outsourcing are not too large, in equilibrium labor-intensive tasks are separated from capital-intensive tasks into distinct firms. When a capital-intensive country is opened to free trade, outsourcing increases and labor rents decline. A decrease in outsourcing frictions lowers labor rents. (JEL J31, L22, L24)Citation
Holmes, Thomas J., and Julia Thornton Snider. 2011. "A Theory of Outsourcing and Wage Decline." American Economic Journal: Microeconomics, 3 (2): 38-59. DOI: 10.1257/mic.3.2.38Additional Materials
JEL Classification
- J31 Wage Level and Structure; Wage Differentials
- L22 Firm Organization and Market Structure
- L24 Contracting Out; Joint Ventures; Technology Licensing
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