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A Theory of Outsourcing and Wage Decline

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  • Thomas J. Holmes
  • Julia Thornton Snider

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)

Suggested Citation

  • Thomas J. Holmes & Julia Thornton Snider, 2011. "A Theory of Outsourcing and Wage Decline," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 38-59, May.
    • Handle: RePEc:aea:aejmic:v:3:y:2011:i:2:p:38-59
    Note: DOI: 10.1257/mic.3.2.38
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    References listed on IDEAS

    as
    1. Avinash K. Dixit & Gene M. Grossman, 1982. "Trade and Protection with Multistage Production," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(4), pages 583-594.
    2. repec:hrv:faseco:4784031 is not listed on IDEAS
    3. Pol Antràs & Luis Garicano & Esteban Rossi-Hansberg, 2006. "Offshoring in a Knowledge Economy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(1), pages 31-77.
    4. Gene M. Grossman & Elhanan Helpman, 2005. "Outsourcing in a Global Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(1), pages 135-159.
    5. Liao, Wen-Chi, 2010. "Outsourcing and computers: Impact on urban skill level and rent," Regional Science and Urban Economics, Elsevier, vol. 40(2-3), pages 136-154, May.
    6. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    7. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Trading Tasks: A Simple Theory of Offshoring," American Economic Review, American Economic Association, vol. 98(5), pages 1978-1997, December.
    8. Virginia Doellgast & Ian Greer, 2007. "Vertical Disintegration and the Disorganization of German Industrial Relations1," British Journal of Industrial Relations, London School of Economics, vol. 45(1), pages 55-76, March.
    9. Arindrajit Dube & Ethan Kaplan, 2010. "Does Outsourcing Reduce Wages in the Low-Wage Service Occupations? Evidence from Janitors and Guards," ILR Review, Cornell University, ILR School, vol. 63(2), pages 287-306, January.
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    Citations

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    Cited by:

    1. Carluccio, Juan & Bas, Maria, 2015. "The impact of worker bargaining power on the organization of global firms," Journal of International Economics, Elsevier, vol. 96(1), pages 162-181.
    2. Stefany Moreno Burbano, 2016. "Estructura vertical de la industria manufacturera colombiana entre 1990 - 2013," Borradores de Economia 925, Banco de la Republica de Colombia.
    3. Bridgman, Benjamin, 2015. "Competition, work rules and productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 136-149.
    4. Berlingieri, Giuseppe & Pisch, Frank, 2022. "Managing export complexity: the role of service outsourcing," LSE Research Online Documents on Economics 117832, London School of Economics and Political Science, LSE Library.
    5. Ho, Wai-Ming, 2021. "International outsourcing, exchange rates, and monetary policy☆," Journal of International Money and Finance, Elsevier, vol. 118(C).
    6. Carlos Alberto Belchior Doria Carneiro & Geovana Lorena Bertussi, 2018. "Outsourcing And Efficiency Wages: The Case Of Brazil," Anais do XLIV Encontro Nacional de Economia [Proceedings of the 44th Brazilian Economics Meeting] 233, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].

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    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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