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American Economic Journal: Microeconomics: Vol. 3 No. 2 (May 2011)

AEJ: Micro Volume. 3, Issue 2 | Previous ArticleNext Article

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A Theory of Outsourcing and Wage Decline

Article 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.3.2.38

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)

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Online Appendix (94.55 KB)

Authors

Holmes, Thomas J. (U MN and Federal Reserve Bank of Minneapolis)
Snider, Julia Thornton (UCLA)

JEL Classifications

J31: Wage Level and Structure; Wage Differentials
L22: Firm Organization and Market Structure
L24: Contracting Out; Joint Ventures; Technology Licensing

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