Strategic interaction between unionised oligopolists results in within-industry dispersion in wages and organisational forms. International outsourcing may not lead to lower wages and marginal costs.
We develop an oligopoly model in which firms facing unionised domestic labour markets choose between producing an intermediate good in-house and outsourcing it to a non-unionised foreign supplier that makes a relationship-specific investment in developing the intermediate. The paper sheds light on the issue of whether international outsourcing offers a means to ‘escape’ the power of domestic unions and on the existence of intra-industry wage dispersion. We show that outsourcing typically increases marginal costs even when it lowers union wages. Despite this, more powerful unions increase the incentive to outsource.
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Dermot Leahy and Catia Montagna
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