A Theory of Outsourcing and Wage Decline

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...

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Veröffentlicht in:American economic journal. Microeconomics 2011-05, Vol.3 (2), p.38-59
Hauptverfasser: Holmes, Thomas J., Snider, Julia Thornton
Format: Artikel
Sprache:eng
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Zusammenfassung: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.
ISSN:1945-7669
1945-7685
DOI:10.1257/mic.3.2.38