Outsourcing, Inequality and Aggregate Output

Abstract

Outsourced workers experience large wage declines, yet domestic outsourcing may raise aggregate productivity. To study this equity-efficiency trade-off, we contribute a framework in which firms either hire many imperfectly substitutable worker types in-house by posting wages along a job ladder, or rent labor services from contractors who hire in the same frictional labor markets. Three implications arise. First, more productive firms are more likely to outsource to save on higher wage premia. Second, outsourcing raises output at the firm level. Third, contractors endogenously locate at the bottom of the job ladder, implying that outsourced workers receive lower wages. Using firm-level instruments for outsourcing and revenue productivity, we find empirical support for all three predictions in French administrative data. After structurally estimating the model, we find that the rise in outsourcing in France between 1996 and 2007 raised aggregate output by 3% and reduced the labor share by 0.7 percentage points. A 9% minimum wage increase stabilizes the labor share and maintains two thirds of the output gains.