DP6998 Can Deunionization Lead to International Outsourcing?

Author(s): Kjell Erik Lommerud , Frode Meland , Odd Rune Straume

Publication Date: October 2008

Keyword(s): Deunionization , Globalization , International outsourcing

JEL(s): F16 , J51 , L24

Programme Areas: International Trade and Regional Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP6998.asp.asp

We analyze unionized firms’ incentives to outsource intermediate goods production to foreign (low-cost) subcontractors. Such outsourcing leads to increased wages for the remaining in-house production. We find that stronger unions, which imply higher domestic wages, reduce incentives for international outsourcing. Though somewhat surprising, this result provides a theoretical conciliation of the empirically observed trends of deunionization and increased international outsourcing in many countries. We further show that globalization - interpreted as either market integration or increased product market competition - will increase incentives for international outsourcing.