Outsourcing, Inequality and Aggregate Output

Abstract

Outsourced workers experience large wage declines, yet domestic outsourcing may raise aggregate productivity. To study this equity-efficiency trade-off, we contribute a framework in which more productive firms either post higher wages along a job ladder to sustain a larger in-house workforce, comprised of many imperfectly substitutable worker types and subject to decreasing returns to scale, or rent labor services from contractors who hire in the same frictional labor markets. Three implications arise: more productive firms are more likely to outsource to save on higher wage premia; outsourcing raises output at the firm level; labor service providers endogenously locate at the bottom of the job ladder, implying that outsourced workers receive lower wages. Using firm-level instruments for outsourcing and revenue productivity, we find empirical support for all three predictions in French administrative data. After structurally estimating the model, we show that the rise in outsourcing in France between 1997 and 2007 increased aggregate output by 1% and reduced the labor share by 3 percentage points.

Productivity Dispersion, Between‐Firm Competition, and the Labor Share

“…For instance, see Barkai (2020), Eggertsson, Robbins, and Wold (2021), De Loecker, Eeckhout, and Unger (2020), and Edmond, Midrigan, and Xu (2018 for product market power and Azar, Marinescu, and Steinbaum (2020), Benmelech, Bergman, and Kim (2020), Berger, Herkenhoff, and Mongey (2019), and Brooks, Kaboski, Li, and Qian (2021 for labor market power. 4 Recent applications of the Burdett and Mortensen (1998) model to study the wage-setting behavior of firms include: Meghir, Narita, and Robin (2015), who study the role of informal labor markets, Engbom and Moser (2021), who study the effect the minimum wage on inequality in Brazil, Heise and Porzio (2021) who study the role of firms and location preferences in shaping spatial wage gaps, and Bilal and Lhuillier (2021), who study the effect of outsourcing. which delivers analytical tractability and allows me to obtain my main theoretical results.…”

“…44 Recent applications of the Burdett and Mortensen (1998) model to study the wage‐setting behavior of firms include: Meghir, Narita, and Robin (2015), who study the role of informal labor markets, Engbom and Moser (2021), who study the effect the minimum wage on inequality in Brazil, Heise and Porzio (2021) who study the role of firms and location preferences in shaping spatial wage gaps, and Bilal and Lhuillier (2021), who study the effect of outsourcing. …”

Firm and Worker Dynamics in a Frictional Labor Market

“…Random search models with wage posting feature both on‐the‐job search and a firm‐size distribution. Bilal and Lhuillier (2021) introduce decreasing returns in the steady‐state Burdett and Mortensen (1998) environment, but handling productivity shocks remains out of reach. With constant returns to scale, out of steady‐state dynamics in the Burdett and Mortensen (1998) model are studied by Moscarini and Postel‐Vinay (2013, 2016), Coles and Mortensen (2016), Engbom (2017), Gouin‐Bonenfant (2018), and Audoly (2019).…”

Labor Market Effects of Bounds on Domestic Outsourcing

“…While this trend may have the benefit of reducing labor costs for large employers, study after study finds that it worsens labor market conditions for workers who serve as outsourced manpower. Goldschmidt and Schmieder (2017), Drenik et al (2021), Bilal and Lhuillier (2021), Dube and Kaplan (2010), and Spitze (2022) find that these workers enjoy lower wages or benefits, such as employer-financed health insurance, than non-outsourced workers. 1 Several governments around the world have responded to this situation by enacting measures to improve outsourced workers' living standards.…”