Outsourcing of Unionized Firms and the Impact of Labor Market Policy Reforms |
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| Authors: | Erkki Koskela Ronnie Schöb |
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| Institution: | 1. Department of Economics, 00014 University of Helsinki, Finland;2. School of Business & Economics, Freie Universit?t Berlin, Boltzmannstr;3. We thank Thomas Aronsson and Vidar Christiansen for comments in Nordic Workshop on Tax Policy and Public Economics, October 2008, Uppsala, Sweden, and an anonymous referee for valuable suggestions to improve the paper. Erkki Koskela thanks Freie Universit?t Berlin for great hospitality and Ronnie Sch?b thanks the Research Unit of Economic Structures and Growth (RUESG) for great hospitality. Koskela also thanks the Yrj? Jahnsson Foundation and the Academy of Finland (grant no. 111 7698) for financial support. |
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| Abstract: | This paper shows that outsourcing of parts of the workforce in unionized firms leads to wage moderation both in the case of strategic and flexible outsourcing. As long as the share of the outsourced workforce is not too large, this wage‐moderation effect on domestic employment outweighs the direct substitution effect so that domestic employment increases in unionized firms as outsourcing costs fall. With respect to the impact of labor tax reform changes in the wage tax rate, the tax exemption and the unemployment benefit payments affect domestic wage setting in the same way as in the absence of outsourcing. Furthermore, increasing the degree of tax progression by keeping the relative tax burden per worker constant continues to be good for employment. However, except for low outsourcing activities, the impact of these policy measures will become smaller as outsourcing costs fall. |
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