TY  - JOUR
AU  - Holmes,Thomas J.
AU  - Snider,Julia Thornton
TI  - A Theory of Outsourcing and Wage Decline
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14856
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14856
L1  - http://www.nber.org/papers/w14856.pdf
N1  - Author contact info:
Thomas J. Holmes
Department of Economics
University of Minnesota
4-101 Hanson Hall
1925 Fourth Street South
Minneapolis, MN 55455
Tel: 612/625-4512
Fax: 612/624-0209
E-Mail: holmes@umn.edu

Julia Thornton Snider
Dept of Economics, Univ of Minnesota
4-101 Hanson Hall, 1925 4th St S
Minneapolis, MN 55455
E-Mail: thornton@umn.edu
AB  - We develop a theory of outsourcing in which there is market power in one factor market (labor) and no market power in a second factor market (capital). There are two intermediate goods: one labor-intensive and the other capital-intensive. We show there is always outsourcing in the market allocation when a friction limiting outsourcing is not too big. The key factor underlying the result is that labor demand is more elastic, the greater the labor share.  Integrated plants pay higher wages than the specialist producers of labor-intensive intermediates. We derive conditions under which there are multiple equilibria that vary in the degree of outsourcing. Across these equilibria, wages are lower the greater the degree of outsourcing. Wages fall when outsourcing increases in response to a decline in the outsourcing friction.
ER  -