Outsourcing, Income Distribution, and Unemployment

Outsourcing, Income Distribution, and Unemployment

This paper examines the effects of outsourcing on employment and unemployment and income distribution in an economy with Harris-Todaro type unemployment. This is because both wages and jobs are important concerns for an economy that engages in outsourcing and consequently experiences widespread unemployment. The main findings of this paper are as follows: (i) If the outsourced factor is not produced domestically, outsourcing increases the rural wage rate (and the expected urban wage rate) and decreases the unemployed-to-employed ratio in the urban area, and it may increase unemployment in the home country. (ii) If the outsourced factor is produced domestically, outsourcing may decrease the rural wage rate (and the expected urban wage rate), and may increase the unemployedto- employed ratio in the urban area if the rural wage rate is not sensitive to the employment in the rural sectors.