DP6605 | Outsourcing, Unemployment and Welfare Policy

Publication Date

14/12/2007

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Abstract

Outsourcing of labour intensive activities challenges the welfare state and undermines the protection of low-skilled workers. The stylized facts are that profits are concentrated among the high-skilled, involuntary unemployment is mostly among the low-skilled, and private unemployment insurance is missing. This paper analyzes the effectiveness of redistribution and social insurance and characterizes the optimal welfare policy when heterogeneous firms can outsource labour intensive components to low-wage economies.