Unemployment and welfare consequences of international outsourcing under monopolistic competition

This paper challenges the conventional academic view that international outsourcing is just another form of gainful trade. Contrary to that view, we show that labour‐service outsourcing can reduce the high‐wage country's welfare even when product‐market trade is beneficial, within a model that combines involuntary unemployment and monopolistic competition. Outsourcing's impact on welfare is worsened by a definite loss of jobs and a possible contraction in the range of varieties produced worldwide. While owners of capital benefit from outsourcing under certain conditions, labour's welfare always falls.     

International Outsourcing and Unemployment in a Minimum‐wage Economy

To explore the impact of international outsourcing on unemployment and social welfare, the conventional trade model is extended by including both economies of scale and a minimum‐wage constraint in the unskilled‐labor market. In the paper, the scale economies are linked with the production of the most skill‐intensive good. It is shown that within such a framework, there is a trade‐off between a more socially desirable endowment allocation and a greater level of employment. Therefore, even though outsourcing could raise aggregate employment, this benefit is at the cost of further exacerbating the resource misallocation. In this way, the extensions to the traditional framework explored in the paper generate new insights as to why outsourcing may cause a net welfare loss to the home country.     

The impact of trade on employment,welfare, and income distribution in unionized general oligopolistic equilibrium

This paper sets up a multi-sector general oligopolistic equilibrium trade model in which all firms face wage claims of firm-level unions. By accounting for productivity differences across industries, the model features income inequality along multiple lines, including inequality between firm owners and workers as well as within these two groups of agents, and involuntary unemployment. We use this setting to study the impact of trade liberalization on key macroeconomic performance measures. In particular, we show that a movement from autarky to free trade with a fully symmetric partner country lowers union wage claims and therefore stimulates employment and raises welfare. Whether firms can extract a larger share of rents in the open economy depends on the competitive environment in the product market. Furthermore, the distribution of profit income across firm owners remains unaffected, while the distribution of wage income becomes more equal when a country opens up to trade with a fully symmetric trading partner. We also analyze how country size differences and technological dissimilarity of trading partners affect the results from our analysis.     

Trade and Real Wages: a Macroeconomic Model*

We offer a new paradigm to understand the effects of trade on factor rewards. It utilizes the classical‐Keynesian model, and shows that normally a country’s trade deficit hurts labor by lowering the real wage, but benefits the owners of capital. The effects of tariffs on factor rewards and employment are opposite to those of the trade deficit, which falls with a rise in the tariff rate. Countries with trade shortfalls unambiguously benefit from their tariffs, because laborers far outnumber capitalists, who suffer from the declining interest rate. Thus, tariffs lead to a rise in social welfare in trade‐deficit countries.     

Public policy,footloose capital,and union influence

This document sets up a unionized general oligopolistic equilibrium model of countries, where capital is footloose and governments maximize utilitarian welfare. When capital owners have weak influence on public policy, there is unemployment and the governments compete for jobs, causing a distortion with suboptimal wages. Then globalization—as characterized by a decrease in impediments to international investment—increases the wage elasticity of capital flight, decreasing wages and increasing employment. This benefits the capital owners and the unemployed workers getting a job, but harms the other workers. International coordination of public policy alleviates these consequences of globalization.     

国际服务外包、就业与工薪差距:基于中国工业行业数据的实证分析

笔者利用投入产出表以及工业行业面板数据对国际服务外包的就业效应及工薪差距效应进行了实证检验,结果显示:工业行业国际服务外包促进了就业,并且扩大了高技能劳动力与低技能劳动力的工薪差距.当考虑行业要素密集度差异时,国际服务外包对资本密集型行业和劳动密集型行业的就业和工薪差距均有正向扩大作用,但在资本密集型行业这种扩展效应更大.     

A Union-bashing Model of Inflation Targeting

This paper shows that in an open two‐sector economy, centralization of wage setting may be important in determining the employment (and welfare) effects of different monetary targets. By disciplining unions in the sectors open to international trade, exchange rate targeting yields higher employment than inflation targeting when wage‐setting is more centralized in the open sector than in the shielded sector. When wage‐setting centralization is higher in the shielded sector, we show that general price‐level inflation targeting, while better than exchange rate targeting, is inferior to an inflation target that focuses more heavily on shielded sector prices.     

Strategic Delegation of Multiple Tasks

This paper studies both the owner–manager relationship and the union–firm relationship in a model of unionised duopoly to analyse whether a firm's owner delegates the task of wage bargaining to a manager along with the task of output determination. We also analyse the profit and welfare effects of multiple‐task delegation. It has been shown in the literature that, when there is only one delegation task – output determination – delegation of output decisions to managers leads to lower profits for owners than non‐delegation as pure profit‐maximisation. However, when there are two delegation tasks as in our model – output determination and wage bargaining – we show that owners are better off delegating both tasks than delegating only the output decision or not delegating at all. This result provides a rationale and managerial insight for strategically delegating multiple tasks to managers. Moreover, we show that union utility, consumer surplus and social welfare are all higher when owners do not delegate the task of wage bargaining than when they do. This result suggests that governments implement union contracts that require owners, rather than managers, to negotiate wages with unions in order to benefit unions and consumers and to improve social welfare as well.     

Endogenous domestic market structure and the effects of a trade cost reduction in a unionised industry

In contrast to the existing partial equilibrium literature considering the effects of a trade cost reduction on unionised wage under a given market structure, we show the effects by determining the domestic market structure endogenously. A lower trade cost reduces the number of active domestic firms, but it increases unionised wage in the active domestic firms under decentralised unions. Although a lower trade cost increases wage in the active domestic firms, it reduces domestic employment and total union utility at the free entry equilibrium. So, a trade cost reduction benefits domestic employed workers by increasing the unionised wage, but its effect on the total domestic workers is not favourable. If there is a centralised union, a lower trade cost reduces the number of active domestic firms, unionised wage, domestic employment and union utility.     

Outsourcing and the Heckscher–Ohlin Model

The purpose of this paper is to incorporate the currently mushrooming phenomenon of outsourcing into the standard two‐sector, two‐factor Heckscher–Ohlin model of international trade. We first show how outsourcing modifies a firm's production function, and then demonstrate that outsourcing generally raises the return to capital and lowers the real wage, although the nation's GDP rises in proportion to the value‐added in the outsourcing industry. Furthermore, the output of the outsourcing sector may actually fall even though its unit cost goes down; the output of the other sector then rises. By contrast, employment in the outsourcing sector may actually rise.     

Would a North-South Free Trade Agreement Hurt Unskilled Labor in the North?

I present a simple model to examine the impact of international outsourcing on the welfare of skilled and unskilled labor. In this model, specialized business services are to facilitate manufacturing production, creating additional welfare gains in the presence of positive production externalities. Policies that favor the business service sector contribute to the development of a larger bundle of specialized business services, generating more welfare gains to not only skilled but also unskilled labor. Thus, a country’s unskilled labor is not necessarily worse off with open trade if the country is prosperous in business service provisions.     

To integrate with a high- or low-wage country: That is the question

This paper considers the question of whether a country with the intermediate capital–labor ratio is better off forming a free trade area with the higher or lower wage country. Typical analyses of gains from trade ignore the effects of free trade on factor prices. When Europe forms a free trade area with a high-wage economy, the equalized wage rises and rent declines, while the price of the importable declines. Workers unambiguously benefit, but integration has an ambiguous effect on capitalists. However, consumers as a whole benefit from the integration and workers can more than offset the losses of the capitalists. On the other hand, Europe's integration with a low-wage economy raises rent but lowers the wage and the price of the labor-intensive good. Accordingly, capitalists unambiguously benefit, but integration has an ambiguous effect on workers. Again, welfare of all consumers rises and the capitalists can more than offset the losses of workers.     

Profit Sharing and Outsourcing under Labor Market Imperfection

When the wage rate is set by the labor union, profit sharing and outsourcing is combined in this paper to analyze how the implementation of profit sharing affects individual effort and wage and thus outsourcing. The findings show that profit sharing and wage have an individual effort‐augmenting effect and therefore increase productivity. It is also found that the wage effect of profit sharing in general is ambiguous. There is a wage decreasing substitution effect, but in contrast, there is a wage increasing effect via labor demand elasticity and effort so that outsourcing and employment effects are also ambiguous. Furthermore, it is shown under which condition a firm will implement a profit sharing scheme.     

Aspects of International Fragmentation

The paper uses a specific‐factors framework to address efficiency and distributional implications of international fragmentation which is driven by a low foreign wage rate. Focusing on the cost‐savings linkage between fragmentation and labor demand in the remaining domestic activities, the author establishes a fragmentation surplus. If capital is an indivisible asset specific to the fragment produced abroad, then fragmentation may cause a domestic welfare loss, because outsourcing takes place in discrete steps where it affords firms “quasi‐market‐power” on the domestic labor market. The regime shift from domestic production to fragmentation is modeled as a two‐stage game. In stage one, firms locate indivisible assets at home or abroad; in stage two they choose optimal employment. The share of fragmented firms is endogenously determined. The paper explores conditions under which outsourcing is beneficial for the domestic economy.     

Public firms' merger,employment, and welfare in developing countries: A general equilibrium analysis

This paper examines the effect of a merger of state‐owned firms on wage gap, employment, and social welfare in a general equilibrium setting. For a developing economy with state‐owned firms in the urban sector, a merger via a reduction in the number of the urban state‐owned firms can reduce the cost of capital. It then lowers the skilled wage rate through the factor‐substitution effect, while it raises the unskilled wage by the inflow of capital to the rural sector and hence lowers urban unemployment. In addition, the reduction in the number of the urban state‐owned firms can yield a scale effect to the firms. The beneficial effects on higher urban output and less urban unemployment can improve social welfare of the developing economy.     

International Trade and Unemployment—the Worker‐selection Effect

This paper investigates the labor market effects of trade liberalization. We incorporate trade unions and heterogeneous workers into the Melitz framework. Workers differ with respect to their abilities. Our main findings are: (i) trade liberalization harms low‐ability workers, they lose their job and switch to long‐term unemployment (worker‐selection effect); (ii) high‐ability workers are better off in terms of both higher wages and higher employment; (iii) if a country is endowed with a large fraction of low‐ability workers, trade liberalization leads to a rise in aggregate unemployment—in this case, trade liberalization may harm a country's welfare; (iv) the overall employment and welfare effect crucially hinges on the characteristics of the wage bargain.     

Capital tax,minimum wage,and labor market outcomes

Often an increase in the minimum wage is accompanied by a reduction in the capital tax. This paper analyzes the effects of interactions between the minimum wage and the capital tax in the general equilibrium framework. The analysis is conducted in an inter-temporal search model in which firms post wages. A (binding) minimum wage provides a lower support for the distribution of wages. The paper finds that the interaction of these two policy instruments significantly modify labor market outcomes and welfare cost. In the presence of a binding minimum wage, a decrease in the capital tax leads to an increase in wage dispersion. In contrast, when it is not binding, a lower capital tax may reduce the dispersion in wages. A binding minimum wage magnifies the positive effects of a lower capital tax on labor supply, employment, and output. It also enhances the welfare cost of capital tax. A policy change which involves an increase in the minimum wage and a fall in the capital tax such that employment level remains constant increases welfare and output.     

Tariffs,quotas, and voluntary export restraints with endogenous labor supply

This paper develops a two-good, small-country, general equilibrium trade model with endogenous labor supply and wage taxes, and where trade is restricted by a tariff, or an import quota, or VERs. Within this framework we derive (i) the employment and welfare effects of the three types of trade restrictions, (ii) the price effect of an import quota and VERs, and (iii) the shadow price of foreign exchange under each type of trade restriction. The present results are compared to those where (i) factor supplies are fixed, and (ii) perfect international capital mobility exists.     

Who is afraid of capital mobility? on taxation of labor income and the level of public services in an open economy

This paper deals with the effects of international capital mobility on the taxation of labor income and on the size of the public sector. It employs a model of the labor market where national trade unions set the wage level in their country and national governments set the tax rate of a proportional labor-income tax. The tax revenues are used to finance a public good and unemployment benefits. In this model, competition between the national trade unions caused by international capital mobility leads to full employment, and the governments supply the public good on the first best level. As no unemployment benefits have to be financed, the tax on labor income may decline with the introduction of capital mobility. These tax cuts may even overcompensate the unions for the wage decline.     

Welfare Effects of Foreign Direct Investment: Cost Saving vs. Signaling

We compare the effects of two types of foreign direct investment (FDI) (viz., FDI for trade cost saving and FDI for signaling foreign cost of production) on consumer surplus, profit of the host-country firm and host-country welfare. We show that the effects are dramatically different. If the reason for FDI is to save trade cost, FDI (compared to export) always makes the consumers better off and the host-country producer worse off, while the effect on host-country welfare is ambiguous. However, if the FDI is to signal the foreign cost of production, FDI (compared to export) always makes the host-country producer better off and increases host-country welfare, while it makes the consumers almost always worse off.