Outsourcing, Firm Heterogeneity, and Collective Bargaining

Outsourcing, Firm Heterogeneity and Collective Bargaining

2. Jhao-Hsuan Hsu
3. National Chengchi University, Taiwan
4. Kuang-Chung Hsu
5. University of Central Oklahoma, United States
6. Yungho Weng
7. National Chengchi University, Taiwan
12. Abstract: Whether outsourcing increases or decreases bargained wage is a long-standing debate in the literature. In this paper, we argue that both positive and negative relationships between outsourcing and bargained wages exist because of firm heterogeneity. By introducing heterogeneous productivity to an outsourcing decision and wage bargaining framework, our simulation results indicate that the relationship between bargained wage and firms’ optimal outsourcing intensity depends on the relative value of firms’ productivity ^[a]to the entire productivity distribution. If firms belong to a relatively low productivity group, efficient producers choose higher outsourcing intensity and receive higher bargained wages than those chosen by ^[b]inefficient ones. In the relatively high productivity group, firms with better productivity have lower outsourcing intensity and higher bargained wage in certain cases. Our results are exemplified by the data for U.S. manufacturing in 1990.

JEL Classification: F16, D21, J51

Keywords: International outsourcing; firm heterogeneity; trade unions

1. Introduction

The impact of international outsourcing on the unionized wage under collective bargaining has been widely discussed in the theoretical literature, but controversy remains. Earlier literature, like Mezzetti and Dinopoulos (1991), Bhagwati (1995), Gaston (1998, 2002), and Leahy and Pavelin (2004) conclude that internationalization, including outsourcing, shifts employment from domestic workers to foreign workers, which causes a negative effect on the bargained wage. More recent studies such as Skaksen (2004) and Lommerud et al. (2009) suggest that international outsourcing has a positive impact on negotiated wage. Lommerud et al. (2009) argues that outsourcing increases the bargained wage: since outsourcing decreases labor demand elasticity, labor unions can trade a small number of positions for employees for an increase in wages for those employees who remain. An opinion different from that of Lommerud et al. (2009) is proposed by Koskela and Stenbacka (2009): the wage elasticity of labor demand increases as outsourcing increases; if the relative bargaining power of the labor union is sufficiently high, outsourcing decreases the bargained wage in a high-wage country with an imperfectly competitive labor market.^[1]