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Outsourcing and Labor Taxation in Dual Labor Markets

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  • Koskela, Erkki

    (University of Helsinki)

  • Poutvaara, Panu

    (University of Munich)

Abstract

We evaluate the effects of international outsourcing and labor taxation on wage formation and equilibrium unemployment in dual labor markets. Outsourcing promotes wage dispersion between the high-skilled and low-skilled workers. Higher domestic low-skilled wage tax, higher payroll tax and lower wage tax exemption increase optimal outsourcing. Outsourcing will reduce equilibrium unemployment of low-skilled workers both in the presence and absence of labor taxation. In the presence of outsourcing, wage tax, tax exemption and payroll tax have an ambiguous effect on equilibrium unemployment. Increasing the degree of tax progression decreases the wage rate and increases the demand of low-skilled workers.

Suggested Citation

  • Koskela, Erkki & Poutvaara, Panu, 2008. "Outsourcing and Labor Taxation in Dual Labor Markets," IZA Discussion Papers 3522, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp3522
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jan König & Erkki Koskela, 2013. "The Role of Profit Sharing in Dual Labour Markets with Flexible Outsourcing," LABOUR, CEIS, vol. 27(4), pages 351-370, December.
    2. Aronsson, Thomas & Koskela, Erkki, 2008. "Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment," Umeå Economic Studies 759, Umeå University, Department of Economics.
    3. Koskela, Erkki & Poutvaara, Panu, 2008. "Flexible Outsourcing and the Impacts of Labour Taxation in European Welfare States," IZA Discussion Papers 3699, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    outsourcing; dual labor markets; labor taxation; equilibrium unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J82 - Labor and Demographic Economics - - Labor Standards - - - Labor Force Composition
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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