Outsourcing, Inequality and Aggregate Output

Department of Economics & Decisions Sciences 

Guest Speaker: Adrien BILAL

from University of Chicago and Harvard

Videoconference

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 find that the

rise in outsourcing in France between 1997 and 2007 contributed to raise aggregate output

by 1% and reduce the labor share by 3 percentage points. A small minimum wage increase

can make outsourcing Pareto-improving and stabilize the labor share.

Zoom link : https://hec-fr.zoom.us/j/98650178348