Working Paper

Outsourcing, Unemployment and Welfare Policy

Christian Keuschnigg, Evelyn Ribi
CESifo, Munich, 2008

CESifo Working Paper No. 2452

The paper investigates the consequences of outsourcing of labor intensive activities to low-wage economies. This trend challenges the two basic functions of the welfare state, redistribution and social insurance when private unemployment insurance markets are missing. The main results are: (i) outsourcing raises unemployment and labor income risk of unskilled workers; (ii) it increases inequality among high- and low-income groups; and (iii) the gains from outsourcing can be made Pareto improving by using a redistributive linear income tax if redistribution is initially not too large. We finally derive the welfare optimal redistribution and unemployment insurance policies.

CESifo Category
Social Protection
Keywords: outsourcing, unemployment, social insurance, redistribution
JEL Classification: F230,H210,J640,J650,L230