The Relationship between International Outsourcing and Bargained Wage: A Revisit

ABSTRACT

This article revisits the debate in the literature of outsourcing and bargained wage. We focus on the triggers of international outsourcing. If the triggers are a decrease in foreign per-unit cost and an improvement in foreign workers’ productivity, the effect of international outsourcing on the domestic bargained wage is always positive. Under certain conditions, a deterioration in domestic workers’ productivity and a decrease in the degree of product differentiation, which lead to an increase in international outsourcing, decreases bargained wages. It is important to know what raises the intensity of international outsourcing in the debate.

KEYWORDS:

• International outsourcing
• wage bargaining
• labor unions

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Abraham and Taylor (1996) examined data for 2,700 establishments and argued that since labor unions raise workers’ wages, they increase the probability of firms outsourcing their activities.

² See the detailed discussion in Lommerud, Meland, and Straume (2009), Section 6.5.

³ The trigger Lommerud, Meland, and Straume (2009) considered is bargaining power.

⁴ Examples include Hall and Mairesse (1995), Crépon, Duguet, and Mairessec (1998), and Griffith et al. (2006).

⁵ See Grossman and Helpman (2005) for the theoretical argument of incomplete contracts.

⁶ Domestic R&D could also increase foreign workers’ productivity efficiency because of technology spillover and vice versa. Following the North-South model in most of the theoretical literature, the North owns high-skilled workers, and the South is abundant in low-skilled workers. Since high-skilled workers normally learn new technology faster than low-skilled workers, this study assumes that the internal knowledge flows are imperfect and ignorable in both directions. Based on the same reasoning, the negative effect of an increase in the quality and complexity of the product on the in-house unit-labor requirement is also minor and can be ignored.

⁷ The reservation wage is not necessarily the minimum wage. It is the minimum wage if workers have no other option but to accept the minimum wage at the disagreement point. In this article, for simplicity, we treat $\bar{w}$ as a proxy for the minimum wage.

⁸ $\sigma$ is the price elasticity of demand. It could increase or decrease along with the increase or decrease in market competition. For instance, if an increase in product differentiation reduces market competition, it causes a lower $\sigma$. In the extension section, we also consider $\sigma$ as a trigger of international outsourcing.

⁹ Our idea can be illustrated by the real-world story of a German teddy bear manufacturer. In 2007, the manufacturer moved its production back to Germany from China because it was difficult to maintain the quality of its stuffed animals. The managing director, Martin French, pointed out that producing toys in China to take advantage of cheap labor appeared to make economic sense at first, but it actually turned out to be more costly. Please see Westall (2008).

¹⁰ Another interpretation in light of the law of increasing opportunity cost is that foreign subcontractors start hiring workers with higher productivity in the early outsourcing stage. As the intensity of outsourcing increases, foreign subcontractors need to hire more workers. These later hires tend to be less productive, which increases the unit labor requirement.

¹¹ Görg, Hanley, and Strobl (2008) utilize plant-level data from Irish manufacturing, and Hijzen, Inui, and Todo (2010) employ firm-level data from Japanese manufacturing, 1994 to 2000. Their findings generally suggest that there is a positive impact of international outsourcing on outsourcing firms’ productivity. In addition to that, earlier studies such as Egger and Egger (2006) and Amiti and Wei (2009) are widely cited in most outsourcing literature. Egger and Egger (2006) find international outsourcing raises the long-run productivity of low-skilled workers, and Amiti and Wei (2009) conclude that U.S. firms’ productivity was increased by both material and service outsourcing.

¹² An extension from the linear function to a nonlinear function will be presented in Section 5.

¹³ Here, we present the right-to-manage model. However, the efficient bargaining assumption is another choice for solving bargaining issues. The solutions and results from the efficient bargaining model are similar and available upon request.

¹⁴ Notice that the relative bargaining power affects the bargaining wage positively.

¹⁵ The second-order condition is also satisfied; i.e., $\begin{array}{rl}& {\sigma }^{1-2\sigma }(\sigma -1){\bar{\omega }}^{-\sigma }(k^{\ast })[\sigma {\varphi }^{-1}(\varpi a_{\mathrm{h}}-c{a}_{\mathrm{f}}-c{k}_{\gamma }+\varpi \gamma (1-k))-\gamma (c+\varpi )]\\ & <0c{k}_{\gamma }-{\varpi }_{\gamma }(1-k)=\varpi a_{\mathrm{h}}-c{a}_f\end{array}$ from the first-order condition.

¹⁶ This effect is also mentioned as an “indirect effect” of a stronger technology on outsourcing incentives in Footnote (27) of Lommerud, Meland, and Straume (2009).

¹⁷ $\frac{dw}{d\bar{w}}=\frac{\mathrm{\partial }w}{\mathrm{\partial }\bar{w}}+\frac{\mathrm{\partial }w\left(k\right)}{\mathrm{\partial }k}\frac{\mathrm{\partial }k}{\mathrm{\partial }\bar{w}}>0.$

¹⁸ The appendix can be found online at www.tandfonline.com/uitj.