The Labor Market Effects of Outsourcing Parts and Components: A Simple Model with Cournot Competition

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• Hübler
• M.

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The paper analyses a partial equilibrium outsourcing model with Cournot competition in intermediate good production. Final production is located in Western Europe, whereas the intermediate good can be manufactured by a Western (outsourcing) or Eastern European supplier (offshore outsourcing). The paper asks the question how changes in production costs, in particular wages, affect labour input in the two regions in the presence of Cournot competition. The main results are: higher production costs in one region reduce intermediate good production in both regions leading to a substitution effect between high- and low-skilled labour intensive inputs rather than between Eastern and Western low-skilled labour intensive inputs. The sensitivity of outsourcing activities to production cost changes is highest when the interregional cost differential is smallest.