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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : European Economic Review, Volume 52, Issue 1, January 2008, Pages 116–132
In this paper, we introduce the fairness approach to efficiency wages into a standard model of international fragmentation. This gives us a theoretical framework in which wage inequality and unemployment rates are co-determined and therefore the public concern can be addressed that international fragmentation and outsourcing to low wage countries lead to domestic job-losses. We develop a novel diagrammatic tool to illustrate the main labour market effects of international fragmentation. We also explore how preferences for fair wages and the size of unemployment benefits govern the employment effects of outsourcing and critically assess the role of political intervention that aims to reduce unemployment benefits under internationally fragmented production.
The policy debate in industrialised economies on the international fragmentation of production is mainly driven by the concern over domestic job losses, reflecting the views of the general public on this issue.1 In contrast, the academic literature looking at the economy-wide effects of international fragmentation has so far focused on its effect on relative factor rewards (Jones, 2000 and Kohler, 2004). The effect on aggregate employment cannot be addressed in these models because of the assumption of perfectly competitive labour markets, leading to full employment in equilibrium. The aim of this paper is to develop a framework that bridges the gap between the policy debate and the theoretical analysis of international fragmentation. To this end, we build on a standard general equilibrium model of international fragmentation in a small open economy with perfect competition in goods markets (Jones, 2000 and Jones and Kierzkowski, 2001) and modify it by allowing for labour market imperfections that lead to non-market-clearing wages and involuntary unemployment in equilibrium. We consider a model with two primary inputs, skilled and unskilled labour, which are mobile between sectors in the economy, and potentially three sectors of production. Fragmentation of the production process can occur only in the sector with intermediate skill intensity, thereby capturing in a stylised way the idea that outsourcing is not equally prevalent in all sectors.2 In equilibrium, the economy will produce in at most two of the sectors, where the labour market effects of international fragmentation turn out to depend crucially on whether the active non-fragmented sector is more or less skill intensive than the sector in which fragmentation occurs. Assuming that outsourcing is restricted to the sector with intermediate skill intensity allows us to capture both possibilities in the simplest possible way. The labour market imperfection is introduced by a variant of the efficiency wage model where the efficiency wage is derived from a fairness constraint ( Akerlof, 1982 and Akerlof and Yellen, 1990), an approach for which there is empirical support from both experiments and surveys.3 In this framework, worker effort depends on the wage paid by the firm relative to some standard of reference that the workers perceive to be fair. We follow Akerlof and Yellen (1990) and assume that the fair wage is a weighted average of the income attainable outside the job and the wage of the other skill group (within the same firm), thereby allowing intra-group considerations and inter-group considerations to be present in workers’ fairness preferences. In equilibrium, the fairness constraint is binding for unskilled workers, giving rise to unemployment of this group, while skilled labour is fully employed in equilibrium. An important implication of the fair wage framework is that, ceteris paribus, higher unemployment makes unskilled workers more willing to accept a large skill premium because their outside option worsens.4 The theoretical analysis in this paper shows how the employment and relative wage effects of international fragmentation are jointly determined by relative factor endowments, the skill intensity of the component for which production is retained domestically, preferences towards wage equality and the level of unemployment benefits. Contrary to common views but in line with earlier findings in the academic literature, our model suggests that international fragmentation and outsourcing of labour intensive production processes do not necessarily harm unskilled workers (Arndt, 1997, Kohler, 2003 and Kohler, 2004). In particular, international fragmentation mitigates the unemployment problem and at the same time reduces the skill premium if home production is sufficiently skill intensive overall. The intuition is as follows: The active non-fragmented sector in this case is more skill intensive than the sector in which fragmentation occurs. Fragmentation therefore leads to an expansion of the labour intensive sector, increasing economy-wide demand for unskilled workers. The presence of involuntary unemployment in the model allows us furthermore to compare the effectiveness of reforms to the unemployment benefit system under integrated and internationally fragmented production, respectively. It is shown that the employment effects of a change in unemployment benefits may be smaller under fragmented production than under integrated production, thereby casting into doubt the popular claim that increased international outsourcing makes it necessary to scale down the welfare state in order to make it sustainable in a global economy. There are, to the best of our knowledge, three previous papers that study international fragmentation in a setting with imperfect labour markets. In contrast to our model, all of these studies consider trade union activities as a source of labour market imperfection. Gaston (2002) investigates how outsourcing opportunities affect the nature of collective bargaining. Access to international fragmentation raises the outside options of firms and thereby worsens the bargaining position of unions. But international fragmentation does not occur in the bargaining equilibrium analysed in this paper. Egger and Egger (2003) consider bargaining on unskilled wages in a one-sector model but their analysis builds upon an ad hoc representation of the wage setting curve without any details of the wage determination process.5Skaksen (2004) presents an interesting model of international fragmentation in the presence of trade unions. However, two restrictive assumptions are imposed. First, there is only one sector of production, which rules out any intersectoral adjustments to international fragmentation and, second, there is only one type of labour, so that—in contrast to our study—skill premium and unemployment effects cannot be addressed simultaneously. The remainder of the paper is structured as follows. Section 2 introduces a model of fair wages and international fragmentation and characterises the unemployment effects of outsourcing. Section 3 discusses how the effects of international fragmentation differ in egalitarian and non-egalitarian economies. Section 4 looks at the effects of changing unemployment benefits on wages and employment and compares these effects for the cases of integrated and internationally fragmented production. Section 5 concludes.
نتیجه گیری انگلیسی
This paper has addressed the labour market implications of international fragmentation in a setting with perfectly competitive goods markets and labour market imperfections due to fairness preferences of workers. Applying a novel diagrammatic tool that builds on the well-known Lerner–Pearce diagram, we have investigated how international fragmentation affects the skill premium and unemployment in a small open economy. In particular, we have shed light on the interaction of relative factor endowments, the skill intensity of the component for which production is retained domestically, preferences towards wage equality and the level of unemployment benefits in explaining the labour market implications of international fragmentation. Although it is difficult to find direct empirical support for our theoretical hypotheses, our results at least give an economic intuition for recent (outsourcing-induced) labour market developments in the industrialised world. In this respect, four observations are particularly notable. First, there is considerable empirical evidence for a positive skill premium effect of international outsourcing in the US and the UK (see Feenstra and Hanson, 1996, Feenstra and Hanson, 1999, Hijzen et al., 2005 and Hijzen, 2003). This is consistent with the theoretical results in Section 2, if international fragmentation leads from YZ to AZ production. Second, Egger and Egger (2003) find a substantial increase in the relative employment of skilled labour and a moderate increase in the skill premium in the 1990s, due to better outsourcing opportunities of Austrian manufacturing industries to Central and Eastern Europe after the fall of the Iron Curtain. This labour market outcome can be rationalised by our theoretical model if international fragmentation leads from YZ to AZ production and the considered economy has a strong preference for an egalitarian wage structure. In this case, even a small change in the skill premium may lead to a considerable increase in the unemployment rate (see Section 3). Third, the analysis in Section 4 makes clear that international fragmentation may increase unemployment in a country with low unemployment benefits, while it may decrease unemployment in a country with a generous compensation system. This provides an economic intuition for the observation (from OECD statistics) that a country like Italy, with relatively low unemployment benefit entitlements, suffered from an increase in unemployment in the globalisation process of the 1990s, while countries like Belgium or Denmark, with generous compensation schemes, experienced a decline in their unemployment rates in that period. Fourth, our results in Section 4 show that a decline in the unemployment benefits may be less effective in reducing high unemployment rates if there is international fragmentation and outsourcing of component production to low-wage destinations abroad. This finding may help to explain why recent labour market reforms in Germany (with a substantial reduction in the unemployment benefit entitlements) had not the expected significant employment effects. In any case, the possible impact of international fragmentation on the effectiveness of labour market reforms should be taken into account by policy makers when redesigning the welfare state to meet the challenges of an integrated global economy.