Strategic Outsourcing, Profit Sharing and Equilibrium Unemployment

Abstract

We analyze the following questions under imperfect labour markets. How does strategic outsourcing influence wage formation, profit sharing and employee effort when firms commit to optimal profit sharing before wage formation or decide for profit sharing after wage formation? What is the relationship between outsourcing, profit sharing, and equilibrium unemployment? We find that in both scenarios outsourcing lowers the wage. If the firm will decide on profit sharing after the wage formation, higher profit sharing decreases also the wage. For equilibrium unemployment, we find that the effects of outsourcing and profit sharing on unemployment are ambiguous in both cases