Analysis of Labor Tax Progression under Heterogeneous Domestic Labor Markets and Flexible Outsourcing

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1 DISCSSION PAPER SERIES IZA DP No. 533 Anlysis o or x Progrssion undr rognous Domsi or rks nd Flxil Ousouring Erkki Koskl Novmr 2 Forshungsinsiu zur Zukun dr Ari Insiu or h Sudy o or

2 Anlysis o or x Progrssion undr rognous Domsi or rks nd Flxil Ousouring Erkki Koskl nivrsiy o lsinki nd IZA Disussion Ppr No. 533 Novmr 2 IZA P.O. Box Bonn Grmny Phon: Fx: E-mil: iz@iz.org Any opinions xprssd hr r hos o h uhors nd no hos o IZA. Rsrh pulishd in his sris my inlud vis on poliy, u h insiu isl ks no insiuionl poliy posiions. h Insiu or h Sudy o or IZA in Bonn is lol nd virul inrnionl rsrh nr nd pl o ommuniion n sin, poliis nd usinss. IZA is n indpndn nonproi orgnizion suppord y Dush Pos Foundion. h nr is ssoid ih h nivrsiy o Bonn nd ors simuling rsrh nvironmn hrough is inrnionl nork, orkshops nd onrns, d srvi, proj suppor, rsrh visis nd doorl progrm. IZA nggs in i originl nd inrnionlly ompiiv rsrh in ll ilds o lor onomis, ii dvlopmn o poliy onps, nd iii dissminion o rsrh rsuls nd onps o h inrsd puli. IZA Disussion Pprs on rprsn prliminry ork nd r iruld o nourg disussion. Ciion o suh ppr should oun or is provisionl hrr. A rvisd vrsion my vill dirly rom h uhor.

3 IZA Disussion Ppr No. 533 Novmr 2 ABSRAC Anlysis o or x Progrssion undr rognous Domsi or rks nd Flxil Ousouring Wh r h imps o lor x rorm on g sing nd mploymn o kp h rliv x urdn pr lo-skilld nd high-skilld orkrs onsn in h s o hrognous domsi lor mrks, i.. impr ompiion in lo-skilld lor nd pr ompiion in high-skilld lor in h prsn o ousouring? A highr dgr o x progrssion y rising h g x nd h x xmpion or h lo-skilld orkrs ill drs h g r nd inrs lor dmnd o lo-skilld orkrs, hrs i ill drs inrs mploymn o high-skilld orkrs in CES uiliy union hn h lsiiy o susiuion n onsumpion nd lisur is highr lor hn on. A highr dgr o g x progrssion or h high-skilld orkr ill hv no on h highskilld g in h prsn o CES uiliy union. JE Clssiiion: E24, 22, J2, J3, J5 Kyords: hrognous domsi lor mrks, g rgining, imps o lor xion, ousouring Corrsponding uhor: Erkki Koskl Dprmn o Eonomis nivrsiy o lsinki P.O. Box 7 Arkdinku 7 4 lsinki Finlnd E-mil: rkki.koskl@hlsinki.i Koskl hnks h Admy o Finlnd grn No or innil suppor.

4 I. Inroduion Europn Wlr Ss r hrrizd y dul lor mrks. nskilld orkrs r ypilly unionizd, hil skilld orkrs on ngoi on hir gs individully, nd, hus, mor ompiiv g ormion. isorilly, lor unions hv n l o push or rlivly high gs o unskilld orkrs, h os o highr unmploymn in Coninnl Europ hn in h nid Ss. During h l 2 h nury nd r h glolizion hs pu h Europn lr modl undr inrsing prssur. Wg dirns ross ounris onsiu nrl xplnion or h inrsing dominn usinss pri o inrnionl ousouring ross id rng o indusris s.g. Sinn 27 or n ovrvi nd Snov 26 onrning h Es-Ws dihoomy o ousouring. Ousouring n k o lrniv orms. Firms my ri long-rm onrs h ix h moun o ousouring or h rd union ss h g, i.. srgi ousouring, or lrnivly irms my lxil nough o did upon h moun o ousouring iviy simulnously ih domsi lor dmnd r h domsi g is s y h rd union. Whil hr is lrg lirur on inrnionl ousouring, only onriuions hv sudid h vrious s o g xion in is prsn. Koskl nd Shö 2 nlyz in h s o monopoly rd union h imps o lor x poliy rorms in h prsn o oh srgi nd lxil ousouring hn domsi lor is homognous. his ppr opns n rsrh hm y nlyzing h s o g xion ih lxil inrnionl ousouring hn h domsi lor mrk is hrognous so h lor mrks r imprly ompiiv in h s o lo-skilld orkrs hn monopoly lor union dids h g r o lo-skilld orkrs, nd prly ompiiv in h s o highskilld orkrs so h h high-skilld g djus o quliz lor dmnd nd lor supply y lso ssuming CES-uiliy union hih dpnds on h lsiiy o susiuion n onsumpion nd lisur or high-skilld orkrs. I ssum 2

5 or simpliiy h hr is h rprsniv irm o llo or dirn lor mrk siuion. I ind h in h prsn o lxil ousouring oh in h s o highskilld orkrs CES-uiliy union in ompiiv lor mrk quilirium h high-skilld g dpnds ngivly on h lo-skilld g, hrs h highskilld g dpnds posiivly ngivly on h g x hn h lsiiy o susiuion n onsumpion nd lisur is highr lor hn on, hrs h high-skilld g dpnds ngivly posiivly on h x xmpion hn h lsiiy o susiuion n onsumpion nd lisur is highr lor hn on. In h s o high- skilld orkrs CES-uiliy union in ompiiv lor mrk quilirium highr ousouring g nd highr ousouring os ill inrs h g or h lo-skilld lor us h g lsiiy o h lo-skilld lor ill drs nd hs ill drs h g or h high-skilld lor. A highr unskilld g x r ill inrs h g or h lo-skilld lour nd drs h g or high-skilld lor nd h highr unskilld g x xmpion ill drs h g or h lo-skilld lor nd ill inrs h g or h high-skilld lor. In rms o lor x rorm highr dgr o x progrssion y rising h g x nd h x xmpion or h lo-skilld orkrs o kp h rliv urdn pr lo-skilld orkr onsn ill drs h g r nd inrs lor dmnd o lo-skilld orkrs, hrs i ill drs inrs mploymn o high-skilld orkrs in CES uiliy union hn h lsiiy o susiuion n onsumpion nd lisur is highr lor hn on, A highr lo-skilld g x r ill inrs h g or h lo-skilld lor nd drs h g or high-skilld lor nd h highr lo-skilld g x xmpion ill drs h g or h lo-skilld lor nd ill inrs h g or h high-skilld lor. Similr quliiv u no quniiv s ris lso in h sn o ousouring. Ohr rsrh opi is o ous h rol o hrognous irms o sudy h inrion n g rgining nd orign dir invsmn s.g. Ekl nd Eggr 29 ou his nlysis u in h sn o lor mrk poliy rorms. 3

6 Finlly, highr dgr o g x progrssion or h high-skilld orkr, kping h rliv x urdn pr high-skilld orkr onsn, ill hv no on h high-skilld g in h prsn o CES - uiliy union. Bus hr r no o high-skilld g x progrssion on high-skilld nd lo-skilld g in h s o dirn x prmrs omprd ih lo-skilld orkrs, hr is no mploymn s in his s. Sion II prsns h im squn o h disions rgrding som poliy issus ssoid ih lor xs, g sing or domsi lo-skilld orkrs, lor dmnd or domsi high-skilld nd lo-skilld orkrs, ousouring nd g sing or skilld orkrs. I is sudid h sgmnd domsi lor dmnd or hrognous ork or nd ousouring dision nd g ormion o highskilld orkrs du o mrk quilirium undr lor xion in sion III. Wg ormion y h monopoly lor union or lo-skilld orkrs undr linrly progrssiv g x lvid on orkrs is nlyzd in sion IV. In sion V i is sudid h imps o oh lo-skilld skilld g progrssion nd high-skilld g progrssion on g sing nd mploymn o oh yps o orkrs. Finlly, i is summrizd onlusions in sion VI. II. Bsi Frmork I is nlyz modl ih hrognous domsi orkrs nd inrnionl ousouring. h produion omins lor srvis y high-skilld orkrs nd lo-skilld orkrs. o-skilld lor srvis n providd ihr y h irm s on orkrs, or oind rom rod hrough inrnionl ousouring. I is ssumd h h irms my lxil nough o did upon h moun o ousouring iviy only r h g is s y h lor union. Skksn 24 hs nlyzd h impliions o ousouring or g sing nd mploymn undr imprly ompiiv lor mrks in rms o oh ponil non-rlizd nd rlizd inrnionl ousouring. Also h nlyzs lxil ousouring, u in homognous domsi lor mrks. h im squn or his s is dsrid y Figur. 4

7 sg sg 2 sg 3 im x poliy g ormion o high-skilld nd lo-skilld lor disions lo-skilld g dmnd, ousouring, nd high-skilld lor supply & high-skilld g Figur : im squn o disions h govrnmn ss is poliy sg. A sg 2 ondiionl on poliy hois y h govrnmn, h lor union drmins h g or h lo-skilld orkrs y king ino oun ho his s h dmnd or lor nd ousouring y h irms. A sg 3, irms did on domsi mploymn nd inrnionl ousouring. h gs o h high-skilld lor djus o quliz lor dmnd nd lor supply. h disions h sg r nlyzd y using krd induion. III. or Dmnd, Ousouring Dision nd igh-skilld Wg Formion III.. igh-skilld nd o-skilld or Dmnd nd Ousouring A h ls sg, h irm dids on h high-skilld lor dmnd, h lo-skilld lor dmnd nd ousouring in ordr o mximiz h proi union x,, π F,, g hr nd is h g or lo-skilld lor, is h g or high-skilld lor, g o ousouring. I is ssumd h hil som iviis r sy o ousour, som ohr iviis r mor osly o ousour. hror, h mrginl os o ousouring inrss in h sop o iviis o ousour. o pur his modl h quisiion o unis o h ousourd lo-skilld lor inpu 5

8 o rquir n irrvrsil invsmn 2 g,5 ih ' g nd g ''. his purs h id h irms mk irrvrsil invsmn in h slishmn o norks o supplirs in h rlvn lo-g ounris. I ollo Koskl nd Snk 2 y ssuming Co-Dougls-yp produion union ih drsing rurns o sl ih hr lor inpus, i.. [ ] F,,, hr h prmrs nd r ssumd o sisy: nd. 2 his lr spiiion mns h h mrginl 2 produiviy o h high-skilld lor is highr hn h o h lo-skilld lor. h prmr purs h produiviy o h ousourd lo-skilld lor inpu rliv o h domsi lo-skilld lor inpu. h mrginl produs o highskilld lor, lo-skilld lor nd ousouring r: F F F /, F F /,nd F F. h ousourd lo-skilld lor inpu s h mrginl produs o h domsi high-skilld nd lo-skilld lor inpus s ollos F 2 λ F F F nd F[ ] 2. hus, or his produion union h domsi high-skilld lor inpu nd h ousourd lor inpu r omplmns, hrs h lo-skilld domsi lor inpu nd h ousourd lor inpu r susius in rms o h mrginl produ s o ousouring. Also on n lul rom h produion union h h domsi high-skilld nd lo-skilld lors r omplmns, i.. F. Givn h gs, h ousouring os union irs-ordr ondiions hrrizing h domsi high-skilld nd lo-skilld lor dmnds nd ousouring r 2 Ehir 25 hs inrodud prly rld Co-Dougls ggrg produion union, hr domsi lo-skilld lor nd ousouring r susius nd domsi high-skilld lor nd ousouring r omplmns, o nlyz h dision n inrnionl ousouring nd in-hous produion in h nlysis o h o glolizion on h skill prmium. 6

9 7 F π, 2 F π, 2 F π. 2 hs irs-ordr ondiions 2 nd 2 imply h olloing rlionship n h high-skilld lor nd h lo-skilld lor inlusiv o ousouring. 3 sing 2 nd 2 hv 4 hr,, nd,. Aording o 4 h highr lo-skilld domsi g r, nd h highr produiviy o ousourd lor inpu ill inrs ousouring, hil h highr ousouring g nd h highr ousour os ill drs lxil ousouring. In h s o produion union [ ] F,, ousouring lsiiis hv h olloing indings: l l, nd. h lsiiis ih rsp o lo-skilld g, produiviy o ousourd lor inpu, nd ousouring g in h prsn o ousouring r highr hn on. ighr lo-skilld g ill drs hs lsiiis, i.. 2 nd highr ousouring g ill inrs

10 8 hs g lsiiis, i.. 2. Susiuing h RS o 3 or ino 2 givs λ so h h lo-skilld lor dmnd n xprssd s m m, 5 hr [ ] m, nd. hs r highr ih drsing rurns o sl. Aording o 5, mor xnsiv ousouring iviy du o lor ousouring os ill drs h lo-skilld lor dmnd, hih lis in onormiy ih mpiril vidn. 3 orovr, highr ousouring g ill inrs h lo-skilld lor dmnd, i... In h prsn o ousouring h g lsiiis o h lo-skilld lor, nd, n rin s ollos, 6 hr nd. 6 3 For insn, Görg nd nly 25 hv usd pln-lvl d o h Irish lroni sor o mpirilly onlud h inrnionl ousouring rdus pln-lvl lor dmnd.

11 9 h highr is ousouring du o vrious prmr hngs, hn hv h olloing s 2 2 nd 2. hs r in onormiy ih mpiril vidn ording o hih highr ousouring inrss h g lsiiis o lo-skilld domsi lor dmnd. 4 Also on n sho h highr ousouring produiviy ill inrs h g lsiiis, i... h highr ousouring os nd ousouring g ill drs h on g lsiiy o lo-skilld lor 2 2 2, 7 nd 2 2, 7 nd i ill lso hv h sm quliiv s on h ross g lsiiy o loskilld lor, i.. 2, d 4 Slughr 2 nd sn l. 27 hv shon in mpiris h inrnionl rd hs inrsd h g lsiiy o lor dmnd.

12 nd Finlly, susiuing h RS o quion 5 ino h rlionship n in quion 3 y using h produion union [ ] F,, givs h olloing dmnd or h high-skilld lor m, 8 hr, nd. hs lsiiis r lso highr ih kr drsing rurns o sl, u in his modl unlik in h s ih h lo-skilld lor, oh h on g nd ross g lor dmnd lsiiis r indpndn o ousouring. h highr on g, nd ross g ill o ours ngivly h high-skilld lor dmnd. W n no summriz hs indings rgrding h propris o h domsi lor dmnd in h prsn o lxil ousouring s ollos. Proposiion In h prsn o lxil ousouring h on g lsiiy nd h ross g lsiiy or h loskilld lor dmnd dpnd ngivly on h ousouring g nd ousouring os, hrs oh h on g nd h ross g lsiiis or h high-skilld lor dmnd r dirly indpndn o h ousouring g nd ousouring os. III.2. Wg Formion or igh-skilld Workrs III.2.. Opiml or Supply o igh-skilld Workrs I ssum or simpliiy h h mrk quilirium or h high-skilld g ollos rom h quliy o lor dmnd nd lor supply in h s o CES uiliy union or high-skilld orkr. Firs i is drivd lor supply nd r h

13 g ormion rom mrk quilirium y king h lo-skilld g givn. s I is ssumd h h govrnmn n mploy h proporionl g x or skilld orkr, hih is lvid on h g r hus h ol x s in his s is minus x xmpion., hr is lor supply. In h prsn o posiiv x xmpion h mrginl g x xds h vrg g x r / so h h sysm is linrly progrssiv. 5 h n-o-x g, h skilld orkr rivs, is. or supply o h high-skilld orkr is drmind y uiliy mximizion s.. onsumpion C nd lisur drmind y mximizing C. sing h si CES uiliy union in rms o h lor supply y h high-skilld orkr is - u C, C s.. C, 9 hr, nd dsris h lsiiy o susiuion n onsumpion nd lisur. By using h noion Z h irs-ordr ondiion or lor supply n xprssd s ollos, u C Z, so h hv h olloing lor supply s. 5 For sminl ppr ou x progrssion, s usgrv nd hin 948, nd or nohr lorion, s.g. mr 2, hprs 7-8.

14 2 h s o h g, g x nd x xmpion on h opiml lor supply r in his s h olloing 2 s s, 2 2 s s, 2 2 s s. 2 hror highr g r nd x xmpion ill inrs drs lor supply o high-skilld orkr i h lsiiy o susiuion n onsumpion C nd lisur is highr smllr hn on, hil highr g x ill drs inrs lor supply o high-skilld orkr i h lsiiy o susiuion n onsumpion C nd lisur is highr smllr hn on. In h s o Co-Dougls uiliy union ih lor supply dos no dpnd on g r,, g x nd x xmpion us s. III.2.2. rk Equilirium nd Compriv Sis or igh-skilld Wg Formion nlik in h s o lo-skilld orkrs ssum h h high-skilld g is drmind y h mrk quilirium onrning h quliy o h lor dmnd union nd h lor supply union. No quliy o dmnd, quion 8, nd supply o lor, quion, s givs

15 3 m, 3 hih n xprssd impliily in rms o high-skilld nd lo-skilld gs s m. 4 ndr quion 4 n rin xpliily s m. h rlionship rom h implii union 4 n h hngs in h highskilld g nd h lo-skilld g is h olloing on d m d hr [ ] us so h. his n no xprssd s [ ] m d d. 5 In his mor gnrl CES uiliy union s hr is ngiv rlionship n h high-skilld g nd h lo-skilld g, hih oms vi h highskilld lor dmnd, hr h lo-skilld g hv ngiv on h highskilld lor dmnd du o omplmnry o nd in rms o produion. his implis h highr ousouring onrning domsi lor inpu ill inrs h g r o high-skilld orkrs us i drss h g r o lo-

16 4 skilld-orkrs, hih lis in onormiy ih mpiris. I hs n mpirilly shon h highr ousouring ill drs g ormion o lo-skilld orkrs nd inrs g ormion o high-skilld orkrs, i.. h g disprsion ill inrs. 6 h rlionship rom h implii union 4 n h hngs in h high-skilld g nd x prmrs r s ollos [ ] d d s, 5 nd [ ] d d s. 5 Aording o hs lulions, highr g x nd lor x xmpion ill inrs drs h high-skilld g i h lsiiy o susiuion n onsumpion C nd lisur is highr smllr hn on, us undr hs ondiions lor supply drss inrss s quions 2- or dils. In h s o hr is no o x prmrs on h high-skilld orkrs. W n no summriz our indings rgrding h propris o h highskilld g drminion in h prsn o ousouring s ollos. 6 S vidn rom vrious ounris hih lis in onormiy ih his,.g. Brun nd Shl 27, Fnsr nd nson 999, ijzn l 25, ijzn 27, Eggr nd Eggr 26, Rily nd Young 27 nd Gishkr nd Görg 28.

17 Proposiion 2 In h prsn o lxil ousouring oh in h s o high -skilld orkrs CES-uiliy union in ompiiv lor mrk quilirium h high-skilld g dpnds ngivly on h lo-skilld g, hrs h high-skilld g dpnds posiivly ngivly on h g x hn h lsiiy o susiuion n onsumpion nd lisur is highr lor hn on, hrs h high-skilld g dpnds ngivly posiivly on h x xmpion hn h lsiiy o susiuion n onsumpion nd lisur is highr lor hn on, hil h high-skilld g is indpndn o x prmrs hn h lsiiy o susiuion n onsumpion nd lisur is on. IV. Wg Formion y onopoly or nion or o-skilld Workrs No i is nlyzd h g ormion o lo-skilld orkrs so h i ks pl in niipion o opiml lor nd ousouring disions y h irm y ousing h g ormion y h monopoly lor union s lso Chu nd Zylrrg 24, p onrning h monopoly union spiiion, hih drmins h g or lo-skilld orkrs in niipion o opiml inhous lo-skilld lor dmnd in h prsn o lxil ousouring drmind simulnously nd o mrk quilirium or h high-skilld g. IV.. Wg Formion y h onopoly or nion h mrk quilirium or h high-skilld g ollos rom h quliy o lor dmnd nd h lor supply y ousing h s o CES uiliy union, prsnd in Sion III. h monopoly lor union drmins h g or lo-skilld orkrs in niipion o opiml domsi lor dmnds nd highskilld g nd ousouring disions y h irm. I ssum h govrnmn n 5

18 6 mploy proporionl x r, hih is lvid on h g r minus x xmpion, i.. h ol x s is. In h prsn o posiiv x xmpion h mrginl g x xds h vrg g x r / so h h sysm is linrly progrssiv nd h n-o-x g is. h lour x sysms in ll h OECD ounris r progrssiv nd sho signiin dirns in h dgr o x progrssion. 7 h ojiv union o h lor union is ssumd o N N V, hr is h xognous ousid opion vill o h unskilld orkrs nd N is h numr o lor union mmrs. h monopoly lor union ss g or h unskilld orkrs so s o mximiz h surplus ording o N V mx 6 s.. m m nd s hr h high-skilld lor dmnd is m nd h high-skilld lor supply is s, so h s implis m s quions 8, nd 4. h irsordr ondiion ssoid ih 6 n rin s s Appndix A d d d d V 7 hr in h s o CES-uiliy union [ ] m d d. 7 Sour: OECD 24.

19 7 sing h quion 4 hs n r-xprssd s ollos d d nd 8 d d 8 hr nd. sing 8- in quion 7 n prsnd impliily s ollos in h s o CES-uiliy unions s Appndix A d d d d 9 nd 9 hr. h on g nd ross g lsiiis o lo-skilld lor dmnd r nd s quions 6-6. hs lo-skilld lor dmnd lsiiis r no onsn us h lo-skilld lor dmnd, m m dpnds ngivly in h nonlinr y on h olloing vrils: h high-skilld g, h lo-skilld

20 8 g, ousouring g nd ousouring os nd h produiviy o h ousourd lor inpu rliv o h domsi lo-skilld lor inpu. h opiml lo-skilld g 9- lso h s o h monopoly lor union is n implii orm in h prsn o ousouring, us h mrk-up A dpnds on h lo-skilld g r in non-linr y so h i nno solvd xpliily or h opiml domsi lo-skilld g. Equions 9- n xprssd s 2, 2 hr nd in h prsn o hv h olloing orm or lo-skilld g nd. IV.2. Compriv Sis o o-skilld Wg Formion In ordr o hrriz h o prmrs on h unskilld monopoly rd g ormion i is pplid h implii dirniion. In rms o ompriv sis o h ousid opion or unmploymn ni hv rom h implii g ormion 2 h olloing rsul

21 9 d d 2 2 so h y using / his n xprssd s d d 22 hr nd. Aording o 22 h o ousid opion on lo-skilld g ormion is quliivly h sm ih nd ihou ousouring us h mrk-up in h prsn o CES uiliy union is, A so h, A d d. In h prsn o ihou ousouring h mrk-up is, A so h,, A d d. 8 Dirniing h implii g ormion 2 ih rsp o h loskilld g nd h ousouring g givs 8 O ours, in h sn o ousouring h mrk-up n ousid opion nd g ormion A A is highr hn in h prsn o ousouring.

22 2 d d hih n xprssd y using / s ollos d d 24 hr nd. hs rsuls r quliiv similr in h s o hn. Also h s o highr ousouring os r quliivly similr, i,. d d s quion 7 nd quion 5 implis d d In rms o ompriv sis o h unskilld g x nd h x xmpion hv h olloing rsuls

23 d d d d 2 s Aording o h s o g x nd x xmpion on lo-skilld g ormion r quliivly h sm ih nd ihou ousouring us d d 2 d nd. his is us d hs prmrs do no h mrk-up o g ormion, u hv n only vi h ousid mrk-up. O ours, in h sn o ousouring h mrk-up n ousid opion nd g ormion A is highr hn in h prsn o ousouring. orovr, h quions imply joinly d d ih quion 5 h, nd d d so h h highr g x nd h highr ousid opion o unskilld orkrs ill drs h g or h skilld lor, hil h highr x xmpion o lo-skilld orkrs ill inrs h g or h skilld lor. W n no summriz hs indings in rms o h lo-skilld g ormion in h prsn o lxil ousouring s ollos. Proposiion 3 In h prsn o lxil ousouring in h s o highskilld orkrs CES uiliy union in ompiiv lor mrk quilirium h highr ousid opion ill inrs h g or h lo-skilld lor nd hror drs h g or h high-skilld lor nd 2

24 hs quliiv rsuls r lso quliivly similr u highr in h sn o ousouring, nd h highr ousouring g nd h highr ousouring os ill inrs h g or h lo-skilld lor us h g lsiiy o h lo-skilld lor ill drs nd hs ill drs h g or h high-skilld lor. V. Es o or x Poliy ndr Imprly nd Priv Compiiv Domsi or rks Nx i is nlyzd h o lor g x progrssion on g ormion nd mploymn y h lo-skilld orkrs nd h high-skilld orkrs in domsi lor. V.. Es o lo-skilld g x progrssion on g nd mploymn I ssum h h x rorm ill kp h rliv x urdn pr lo-skilld orkr,, onsn, hih mns R. 27 h govrnmn n ris h dgr o g x progrssion y inrsing nd nd lloing hng in undr h ondiion dr. 9 Formlly hv d d dr, A y o din x progrssion is o look h vrg x progrssion ARP, hih is givn y h dirn n h mrginl x r nd h vrg x r R, ARP R. x sysm is progrssiv i ARP is posiiv nd h progrssion is inrss i h dirn inrss. 22

25 Conrning h lo-skilld g o his rorm hv d d d. Dividing y d nd susiuing h RS o 28 or d/ d givs s Appndix B d d dr 29 so h highr dgr o g x progrssion, kping h rliv x urdn pr lo-skilld orkr onsn, ill drs h lo-skilld g r. In h sn d o ousouring h quliiv is similr, i.., u i is d dr, d quniivly dirn s Appndix B. Finlly, i is hrrizd h unskilld mploymn y rising x progrssion kping h rliv x urdn pr unskilld orkr onsn o inrs nd ording o 28, so h hv h olloing mploymn d d d. Dividing his y d nd susiuing h RS o 28 or d/ d givs d d dr d d 3 d dr. d dr so h highr dgr o g x progrssion kping h rliv x urdn pr lo-skilld orkr onsn, ill inrs h lo-skilld lor dmnd. hs rsuls 29 nd 3 lso hppn quliivly in similr y in h s o homognous domsi lor mrks ih ousouring s Koskl nd Shö 2. h quliiv is lso similr in h sn o ousouring us 23

26 h highr dgr o x progrssion dos no h mrk-up o g ormion hih dpnds on h prsn nd sn o ousouring. h ol onrning dir nd indir s o hngs in loskilld g on h skilld lor dmnd is in h s o CES uiliy union o high-skilld orkrs s ollos d d d d s. [ ] 3 W n no summriz hs indings in rms o h lo-skilld g ormion nd lor dmnd in h prsn o lxil ousouring s ollos. Proposiion 4 In h prsn o lxil ousouring highr dgr o x progrssion y rising h g x nd h x xmpion or h lo-skilld orkrs o kp h rliv urdn pr lo-skilld orkr onsn ill drs h g r nd inrs lor dmnd o lo-skilld orkrs, hrs i ill drs inrs mploymn o high-skilld orkrs in CES uiliy union hn h lsiiy o susiuion n onsumpion nd lisur is highr lor hn on, hil i ill hv no on mploymn o high-skilld orkrs in h s o h lsiiy o susiuion ing on nd quliivly similr s ris in h sn o ousouring. V.2. Es o high-skilld g x progrssion on g nd mploymn his hs n nlyzd in h sn o ousouring undr imprly ompiiv homognous domsi lor mrks.g. in Koskl nd Vilmunn 996 nd in Koskl nd Shö

27 I ssum h h x rorm ill kp h rliv x urdn pr high-skilld orkr,, onsn, hih mns R. 32 h govrnmn n ris h dgr o g x progrssion y inrsing nd nd lloing hng in undr h ondiion dr. Formlly hv d d dr,. 33 Conrning h high-skilld g o his rorm hv d d d. Dividing y d nd susiuing h RS o 33 or d / d givs d d dr or 34 us h numror is zro s Appndix C so h highr dgr o g x progrssion, kping h rliv x urdn pr high-skilld orkr onsn, ill hv no on h high-skilld g in h prsn o CES uiliy union. Bus hr r no o high-skilld g x progrssion on high-skilld nd lo-skilld g in h s o dirn x prmrs omprd ih lo-skilld orkrs, hr is no mploymn s in his s. W n no summriz hs indings rgrding h propris o h domsi lor dmnd in h prsn o lxil ousouring s ollos. Proposiion 5 In h prsn o lxil ousouring highr dgr o g x progrssion or h high-skilld orkr, kping h rliv x urdn pr high-skilld orkr onsn, ill 25

28 hv no on h high-skilld g in h prsn o CES uiliy union, nd his highr-dgr o x progrssion ill hv no mploymn. V.3. Equilirium nmploymn o o-skilld Workrs I is no movd on o xplor h drminns o quilirium unmploymn o unskilld orkrs in dul lor mrks, hn hr is oh unionizd nd ompiiv drminion o gs in h hom ounry. Considr rprsniv indusry ording o quion 9 h monopoly lor union ss h gs ording o Α, or unskilld orkrs ih h mrk-up Α. Assum h ll indusris r idnil nd or h rson on n ngl indusry-spii indis. In gnrl quilirium onx ih lor moiliy ross idnil indusris, u no moiliy ross dirn lor mrk sgmns or prossions, h ndognous ousid opion. By ssuming h h xion is linrly progrssiv oh in h prsn o ging mploymn in idnil indusris nd in h s o no ging mploymn u unmploymn ni, hih spiy s u u B 35 hr u dnos h unmploymn r, orkrs o yp i nd B dnos h unmploymn ni or i dnos h g drmind y h union or orkrs o yp i. In lin ih h lirur rsri ourslvs o ni-rplmn rio q B /, hih is onsn ross h o lor mrk sgmns. Comining 9 nd 35 quion 35 n xprssd s For sndrd jusiiion o his inrprion, s.g. Nikll nd yrd 999 p or urhr disussion. Nikll, S. nd R. yrd 999: or rk Insiuions nd Eonomi Prormn, in Ashnlr, O. nd D. Crd ds: ndook o or Eonomis, Volum 3C,

29 u u q u q 35 ndr his ssumpion hv n u q nd A rin in rms o ndognous ousid opion s A [ u q ] s, h quilirium unskilld unmploymn n prsnd s. In his u q A 36 A highr ni-rplmn rio q, hih ssumd o xognous, ill inrs quilirium unmploymn. Aording o 28, in h prsn o onsn ni-rplmn rio q, h imp o ousouring on quilirium / unmploymn oms vi h mrk-up A. Aording o 36 h quilirium unmploymn in h sgmn dpnds posiivly oh on h ni-rplmn rio q nd on h g mrk-up in h lor mrk. 2 By susiuing h g mrk-ups rom 9 ino 36 on n xpliily hrriz h quilirium unmploymn mong h lo-skilld orkrs, givn ousouring. As mniond rlir h mrk-up o unskilld g ormion A in h prsn o prly ompiiv skilld lor mrk is highr hn in 2 h unmploymn r sisis u i nd only i q, hih i is ssumd o A hold hroughou h nlysis. In ligh o vill d or 2 OECD ounris Bssnini nd Duvl 26 rpor h vrg ni-rplmn rio o q pproximly.27 ih ounry osrvions in h inrvl [.3,.65]. h vrg ni-rplmn rio in OECD ounris hs minly inrsd rom h 96s s.g. l 2 in Nikll l. 25.S Bssnini, A. nd R. Duvl 26: Employmn Prns in OECD Counris: Rssssing h Rol o Poliis nd Insiuions. OECD Eonomis Dprmn Working Ppr No. 486, 26 nd Nikll, S., Nunzi,. nd W. Ohl 25: nmploymn in h OECD Sin h 99s. Wh Do W Kno?, Eonomi Journl, 5,

30 h sn o h pr o prly ompiiv lor mrk so h his hrognous lor mrk g ormion o h unskilld orkrs is highr hn in h homognous unskilld lor mrk. h monopoly union ill inrs h lo-skilld g nd hror i ill drss h skilld g ording o quion 5 so h in h prsn o o prly prly ompiiv domsi lor mrk, h quilirium unmploymn o lo-skilld orkrs is highr, ris prius. In rms o ousouring i givs du d da d q A so h highr ousouring ill drs h quilirium unmploymn o loskilld orkrs us ousouring ill hv ngiv o g ormion. Dirniing quion 36 in rms o g x givs vi du d da d q A 2 s nd so h h ol o highr g x on h g o lo-skilld orkrs is ngiv nd hry inrss h g lsiiy nd lors h mrk-up us o lor lor dmnd. In rms o x xmpion or lo-skilld orkrs hv du d da d q A 2 so h x xmpion in h prsn o ousouring ill hv posiiv on quilirium unmploymn. his is us h ol o highr x xmpion on h g o lo-skilld orkrs is posiiv nd, hry, drss h g lsiiy nd riss h mrk-up us o highr lor dmnd nd drs in ousouring. No h nlysis onnrs on h s o x progrssion or g ormion nd mploymn y looking s h x rorm h inrss x progrssion hil kping h vrg x urdn pr orkr onsn so h 2 28

31 quion 27 R is onsn. h vrg x r progrssion ARP is givn y h dirn n h mrginl x r nd h vrg x r, ARP. h x sysm is progrssiv i ARP is posiiv nd progrssion is inrsd i ARP inrss. Govrnmn riss h dgr o x progrssion y inrsing nd djuss uprds suh h rmins onsn. In his nlysis h ully-lnd puli sor udg sp is no onsidrd, us only som sors my ngg ousouring, u no h hol onomy. Firs h nlysis ouss h g o his x rorm undr Nsh domsi g rgining. Dirniing 27 ih rsp o, nd i onsn givs d d d o kp nd h ol g is d d d. Susiuing h RS o d d d or d in d d d, hr nd, givs hr d d dr nd A A A [ ] 37 2 da du d dr so h. 2 d q A dr hs indings n summrizd s 29

32 Proposiion 6 Whn h ni-rplmn rio is ixd nd lss hn on nd unmploymn nis r xd s unskilld gs, highr g x r nd lor x xmpion ill drs quilirium unmploymn in h prsn o ousouring nd h vrg x urdn pr orkr onsn so h R is onsn nd highr loskilld x progrssion ill drs unmploymn. VI. Conlusions os srn Europn ounris r hrrizd y dul lor mrks, in hih gs o som orkrs r s y lor unions, hil ohr gs r drmind ompiivly. In his ppr I hv sudid n onomy in hih unskilld orkrs orm monopoly lor union, hil skilld orkrs r mployd in ompiiv lour mrks. I nlyz ho h prsn o lxil ousouring, hih is didd r h unskilld g is s y h monopoly lor union, s suh n onomy. I hs n shon in h prsn o lxil ousouring oh in h s o high-skilld orkrs CES uiliy union nd in h s o lsiiy o susiuion n onsumpion nd lisur ing on in ompiiv lor mrk quilirium h high-skilld g dpnds ngivly on h lo-skilld g, hrs h high-skilld g dpnds posiivly ngivly on h g x hn h lsiiy o susiuion n onsumpion nd lisur is highr lor hn on, hrs h high-skilld g dpnds ngivly posiivly on h x xmpion hn h lsiiy o susiuion n onsumpion nd lisur is highr lor hn on, hil h high-skilld g is indpndn o x prmrs undr Co-Dougls uiliy union. orovr oh in h s o high- skilld orkrs CES uiliy union nd h lsiiy o susiuion n onsumpion nd lisur is on in ompiiv lor mrk quilirium highr ousouring g nd highr ousouring os ill inrs h g or h lo-skilld lor us 3

33 h g lsiiy o h lo-skilld lor ill drs nd hy ill drs h g or h high-skilld lor. A highr lo-skilld g x r ill inrs h g or h lo-skilld lour nd drs h g or high-skilld lour nd h highr lo-skilld g x xmpion ill drs h g or h lo-skilld lor nd ill inrs h g or h high-skilld lor. Similr quliiv s ris in h sn o ousouring. In rms o lor x rorm highr dgr o x progrssion y rising h g x nd h x xmpion or h lo-skilld orkrs o kp h rliv urdn pr lo-skilld orkr onsn ill drs h g r nd inrs lor dmnd o lo-skilld orkrs, hrs i ill drs inrs mploymn o high-skilld orkrs in CES uiliy union hn h lsiiy o susiuion n onsumpion nd lisur is highr lor hn on, hil i ill hv no on mploymn o high-skilld orkrs in h s o Co- Dougls uiliy union o high-skilld orkrs. Finlly, i hs n shon h highr dgr o g x progrssion or h high-skilld orkr, kping h rliv x urdn pr high-skilld orkr onsn, ill hv no on h high-skilld g in h prsn o CES uiliy union indpndn o h lsiiy o susiuion n onsumpion nd lisur. Bus hr r no o high-skilld g x progrssion on highskilld nd lo-skilld g in h s o dirn x prmrs omprd ih lo-skilld orkrs, hr is no mploymn s in his s. his rmork suggss vnus or urhr rsrh. I only ous on o n sps. Firs, h rsours h domsi irms spnd on ousouring ill giv ris o lr s in ohr ounris. his suggss h unoordind poliis migh iniin rom h prspiv o soiy s hol, nd h ousouring my provid n rgumn or poliy oordinion ross ounris. his hs n sudid y Aronsson nd Sjögrn 24 in h sn o ousouring. Sond, i is lso vry usul o sudy h r h impliions o opiml monry poliy undr hrognous lor mrks nd ousouring in h s o produ mrk imprions, hhr du o monopolisi or oligopolisi ompiion. 3

34 32 Appndix A: Opiml o-skilld Wg Sing undr inrly Progrssiv Wg xion h irs-ordr ondiion ssoid ih V mx s.. π nd s n rin s ollos d d V A hr h on g lsiiy o h lo-skilld lor dmnd is nd h ross g lsiiy is nd h lo-skilld lor dmnd is m m. Equion A n xprssd s quion 9 in h x. d d d d A2 In h s o h CES uiliy union hv m A3 so h [ ] m d d A4 hr. sing A3 nd A4 givs

35 33 [ ] m d d A5 hr nd. hror, hv h lo-skilld g didd y h monopoly lor union in h prsn o high-skilld orkrs CES-uiliy unions nd A6 hr d d.qed. Appndix B: x Progrssion nd o-skilld or Dmnd Susiuing h RS o 28 ino d d d implis dr d d B hih givs 29, hr h dnominor is posiiv. Conrning h numror in 29 oin h i is ngiv, i.. 2 B B2 hr B nd. Wihou ousouring hv h sm quliiv, u quniivly dirn rsul, i..

36 34 2, dr d d. B3 QED. Appndix C: x Progrssion nd igh-skilld or Dmnd sing quions 5-5 nd xprss h dnominors s [ ] X, C hv X. C2 QED. Rrns: Aronsson,. nd. Sjögrn 24: Eiin xion, Wg Brgining nd Poliy Coordinion, Journl o Puli Eonomis, 88, Chu, P. nd A. Zylrrg 24: or Eonomis, h I Prss. Ekl, C. nd. Eggr 29: Wg Brgining nd ulinionl Firms, Journl o Inrnionl Eonomis, 77, Eggr,. nd P. Eggr 26: Inrnionl Ousouring nd h Produiviy o o-skilld or in h E, Eonomi Inquiry, 44, Ehir, W.J. 25: Glolizion, glolision: rd, hnology nd Wgs, Inrnionl Rvi o Eonomis nd Finn 4, Fnsr, R.C. nd G.. nson 999: h Imp o Ousouring nd igh- hnology Cpil on Wgs: Esims or h nid Ss, , Qurrly Journl o Eonomis, 4, Gishkr, I. nd. Görg 28: Winnrs nd osrs: A iro-vl Anlysis o Inrnionl Ousouring nd Wgs, Cndin Journl o Eonomis, 4, Görg,. nd A. nly 25: or Dmnd Es o Inrnionl Ousouring: Evidn rom Pln-vl D, Inrnionl Rvi o Eonomis nd Finn, 4,

37 sn, R., D. ir nd R.V. Rmsmy 27: rd Rorms, or Rgulions, nd or-dmnd Elsiiis: Empiril Evidn rom Indi, h Rvi o Eonomis nd Sisis, 893, ijzn, A. 27: Inrnionl Ousouring, hnologil Chng, nd Wg Inquliy, Rvi o Inrnionl Eonomis, 5, ijzn, A.,. Görg nd R.C. in 25: Inrnionl Ousouring nd h Skill Sruur o or Dmnd in h nid Kingdom, h Eonomi Journl, 5, Koskl, E. nd R. Shö 22: Opiml For Inom xion in h Prsn o nmploymn, Journl o Puli Eonomi hory, 4, Koskl, E. nd R. Shö 2: Ousouring o nionizd Firms nd h Imp o our rk Poliy Rorms, Rvi o Inrnionl Eonomis, 84, Koskl, E. nd R. Snk 2: Equilirium nmploymn ih Ousouring nd Wg Solidriy undr our rk Imprions, Europn Eonomi Rvi, 54, Koskl, E. nd J. Vilmunn 996: x Progrssion is Good or Employmn in Populr odls o rd nion Bhviour, our Eonomis, 3, mr, P.J. 2: h Disriuion nd Rdisriuion o Inom, 3 rd diion, nhsr nivrsiy Prss. usgrv, R.A. nd. hin 948: Inom x Progrssion, , Journl o Poliil Eonomy, 56, Rily, R. nd G. Young 27: Skill rogniy nd Equilirium nmploymn, Oxord Eonomi Pprs, 59, Sinn,.-W. 27: h Wlr S nd h Fors o Glolizion, CESio Working Ppr No Skksn, J.R. 24: Inrnionl Ousouring Whn or rks r nionizd, Cndin Journl o Eonomis, 37, Slughr,.J. 2: Inrnionl rd nd or-dmnd Elsiiis, Journl o Inrnionl Eonomis, 54, Snov, B.. 26: h Poliil Eonomy o Ousouring in h Europn nion nd h Es-Europn Enlrgmn, Businss nd Poliis 8, issu 2. 35