DP6998 Can Deunionization Lead to International Outsourcing?

Author(s): Kjell Erik Lommerud, Frode Meland, Odd Rune Straume
Publication Date: October 2008
Keyword(s): Deunionization, Globalization, International outsourcing
JEL(s): F16, J51, L24
Programme Areas: Public Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6998

We analyze unionized firms? incentives to outsource intermediate goods production to foreign (low-cost) subcontractors. Such outsourcing leads to increased wages for the remaining in-house production. We find that stronger unions, which imply higher domestic wages, reduce incentives for international outsourcing. Though somewhat surprising, this result provides a theoretical conciliation of the empirically observed trends of deunionization and increased international outsourcing in many countries. We further show that globalization - interpreted as either market integration or increased product market competition - will increase incentives for international outsourcing.