INTNL OUt

International Outsourcing When Labour Markets Are Unionized
Author(s): Jan Rose Skaksen

Source: The Canadian Journal of Economics / Revue canadienne d'Economique, Vol. 37, No.
1 (Feb., 2004), pp. 78-94
Published by: Wiley on behalf of the Canadian Economics Association
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International outsourcing when labour
markets are unionized
Jan Rose Skaksen Department of Economics, Copenhagen

Business School
Abstract. We consider the implications of international outsourcing in a simple

eral equilibrium model where the wage rate is the outcome of negotiations betw
firm and a trade union. The effects of potential, but non-realized, international
sourcing, is a reduction in the wage rate and an increase in employment. Aggre
welfare increases, but the trade union becomes worse off while owners of capital be
better off. Realized international outsourcing gives rise to an increase in the wage r
and a reduction in employment. Aggregate welfare decreases, but the trade u
becomes better off, while owners of capital become worse off.
La sous-traitance internationale quand les marchds du travail sont syndiques. L'au

considere les implications de la sous-traitance internationale dans un modele sim
d'equilibre g6neral oil le taux de salaire est le resultat de n6gociations entre un
entreprise et un syndicat de travailleurs. Les effets de sous-traitance internatio
potentielle mais non-realis&e sont une reduction dans le taux de salaire et un accrois
ment dans le niveau d'emploi. Le niveau g6neral de bien-8tre s'accroit, mais les sy
ques voient leur situation se deteriorer pendant que les proprietaires de capital v
leur situation s'ameliorer. La sous-traitance internationale realis6e entraine un acc
sement dans le taux de salaire et une reduction du niveau d'emploi. Le niveau g6n6ra
bien-etre chute, mais la situation des syndiques s'am6liore alors que celle
proprietaires de capital se d6t6riore.
The main part of this paper was written while I was visiting the University of California a
Santa Cruz, and I gratefully acknowledge the support of the Department of Economics, UC
I have benefitted from comments by two anonymous referees of this journal, Mette Rose
Skaksen, and seminar participants at UCSC, University of Aarhus, University of Southern
Denmark, Odense, and participants in Nordic International Trade Seminar, Copenhagen,
2001. The work on this paper has been undertaken with financial support from the Danish
Social Science Research Council. Email: jrs.eco@cbs.dk.
Canadian Journal of Economics / Revue canadienne d'Economique, Vol. 37, No. 1

February / fevrier 2004. Printed in Canada / Imprime au Canada
0008-4085 / 04 / 78-94 / ? Canadian Economics Association
International outsourcing 79
1. Introduction
Recently, the economic implications of globalization have been a topical issue

both with respect to the change in opportunities for economic growth and with
respect to effects on income inequality. As argued by Rodrik (1997), one effect
of globalization is that some production factors benefit from increased mobil-
ity of goods and factors, while others lose. In this paper, we consider how
improved opportunities for international outsourcing may affect aggregate
social welfare as well as inequality between workers and owners of capital.
More specifically, we illustrate in a simple general equilibrium model how
improved possibilities for international outsourcing may impact on the relative
bargaining strength of firms and trade unions. This in turn has important
implications for aggregate welfare as well as the distribution of welfare.
The effects of globalization on labour markets have been a topical issue in the
last decade. The main focus has been on whether international trade with low-
wage countries hurts (some) workers and, especially, unskilled workers. The root
of this interest has been the increasing wage gap between skilled and unskilled
workers in a number of countries, not least in the United States.' The analyses in
this literature focus on the relative wage between skilled and unskilled workers,
but if labour markets are imperfectly competitive, it also becomes of interest to
consider how international trade and outsourcing affect wage level, unemploy-
ment, as well as aggregate welfare and distribution of welfare. This perspective
may be particularly relevant when European labour markets characterized by
rigidities and the presence of trade unions are considered (see, e.g., Andersen,
Haldrup, and Sorensen 2000). This view is supported by the fact that unemploy-
ment rates in most European countries have been persistently high for several
decades. With this in mind, the focus of our paper is not on relative wages but
on the wage level, employment, and welfare in an economy that is characterized
by an imperfectly competitive labour market.
There is a small literature that considers the effects of foreign direct
investments (hereafter FDI) when labour markets are unionized (see, e.g.,
Bughin and Vannini 1995; Zhao (1995, 1998); and Skaksen and Sorensen
2001). One difference between FDI and international outsourcing to a foreign
company is that FDI requires that the domestic firm invest in production
capacity in the foreign country, while this is not necessarily the case if the
firm chooses to outsource activities to a foreign external supplier. We model
this flexibility of international outsourcing by assuming that the firm decides
whether to outsource after wage bargaining has taken place. Hence, interna-
tional outsourcing can be used as a threat in the wage bargaining, and it turns
out to have important implications.
1 The literature on this topic is huge, and different authors reach different conclusions concerning
the role played by international trade and international outsourcing; see, for example, Leamer
(1994), Krugman (2000), and Feenstra and Hanson (1996, 1999, 2001).
80 J.R. Skaksen
The focus of most of the papers on FDI and unionized labour markets is
different from ours. Bughin and Vannini (1995) focus on what happens in th
country of a multinational enterprise, while we focus on the home countr
(1995, 1998) focus on strategic interaction in an oligopolistic goods m
whereas we focus in more detail on the strategic interaction between the f
and the trade union in the home country. The paper most closely related to
Skaksen and Sorensen (2001), which considers the implications of FDI when
wage rate is the outcome of negotiations between a firm and a trade union
important differences must be noted. For instance, the FDI decision in Ska
and Sorensen is made before the wage-bargaining stage, while in our mode
outsourcing decision is made after the wage negotiation. Furthermore, the
in Skaksen and Sorensen is a partial equilibrium model, whereas our mo
(simple) general equilibrium model. As a result, we can derive insightful co
sions regarding the welfare implications of international outsourcing.
As in Skaksen and Sorensen (2001), we find that international outso
(or FDI) may give rise to an increase in the wage rate, which implies
home-country workers may become better off, even though jobs are move
of the country. Potential, or the threat of, international outsourcing a
important implications for the wage rate and the level of employment. As
argued in Rodrik (1997), this is at the core of some of the most imp
implications of globalization. Some agents face improved opportunitie
affect the relative bargaining strength of production factors. Specifica
find that improved possibilities for international outsourcing, modell
decrease in the cost of international outsourcing, always benefit the fi
hurt the workers as long as outsourcing is non-realized, the reason bei
the firm uses outsourcing as a threat to achieve a lower wage rate in th
bargaining. Owing to inefficiently high wages in unionized labour markets
lower wage implies that aggregate social welfare always increases as a r
improved possibilities for potential, but non-realized, outsourcing.
With respect to realized international outsourcing, our results are
different from those found in Skaksen and Sorensen (2001). If the c
international outsourcing becomes sufficiently low, the firm chooses t
source activities. If this takes place, there will be a drop in the prof
increase in the payoff to the trade union and a reduction in aggregat
welfare. In contrast, it is found in Skaksen and Sorensen (2001) that r
FDI always gives rise to an increase in the firm's profit, while it is am
whether the trade union becomes better off or worse off.
Our paper is also closely related to the literature on international trade and
unionized labour markets, and in particular to Naylor (1999) (see also, e.g.,
Driffill and Ploeg 1995; Huizinga 1993; Naylor 1998). Like us, Naylor (1999)
finds that there is a discontinuous jump in the wage rate at the level of the
trade cost where firms begin to trade internationally. However, Naylor finds
that there is a downward jump in the wage rate, whereas, we identify an
upward jump. This difference is partly due to the fact that Naylor considers
trade in final goods, while we consider international outsourcing. Another

difference is that Naylor finds that decreasing trade costs give rise to an
unambiguous increase in welfare, whereas we find that whether a decrease in
trade costs gives rise to an increase or a decrease in aggregate welfare depends
on the initial level of the trade costs.
The rest of the paper is organized as follows. In section 2, we introduce the model,
and it is solved in section 3. In section 4, we consider the implications of a decrease in
the cost of international outsourcing, and in section 5, we conclude the paper.
2. The model
In this section, we set up a model of a game between a representative firm an

a trade union. The model is a simple general equilibrium model of a small
economy that produces one final good. The price of this good is determined o
the world market, and it is normalized to one. The production process in
firm consists of two activities. One of these activities must take place in
firm, while the other can either take place in the firm or it can be outsource
a foreign supplier. In the following we describe consumers, firms, the la
market, and the game structure of the model.
2.1. Consumers
The utility function of consumers is assumed to be linear and given as
Ui = yi + W(m - li), (1)
where yi is the income (equal to

ment, m is the endowment of tim
economy, there are two kinds o
not work (i.e., li= 0) and worke
this assumption is that the firm
the wage bargaining with respect
labour. Alternatively, we could
the decisions of the firm and the trade union are still 'decentralized' in the sense
that the firm and the trade union do not take into account that trade union
members own shares in the company. This seems to be a reasonable assumption.
Although it is increasingly common for workers to own capital, their portfolio
are usually diversified and not limited to shares of the company they work for
Below, we analyse the aggregate welfare implications of international out
sourcing, and, in order to do so, we assume a utilitarian welfare function
Hence, we aggregate utilities of all consumers (i.e., (1)), implying that aggre
gate welfare becomes
W = II + wL + W(M- L), (2)

where II is total profits, w is the wage
total endowment of time.
82 J.R. Skaksen
2.2. Firms
We assume that there is a representative firm whose technology can be rep
sented by the following Cobb-Douglas production function:2
Q = N OH , a + p < 1, (3)
where N is the input of labour in th
(hereafter activity 1), whereas H is the
either be produced in house or be
international outsourcing). If the in
this production activity is termed acti
The technology in activity 2 is giv
equation:
A = H - Z, (4)
where Z is the am
employment in the
2 (i.e., L = N+ A). W
not possible to wa
reason for this cou
possible to control
the wage rates wer
workers only in th
The unit cost of
given as p. This c
assume that it is
domestic firm to
domestic firm t
sufficient condit
intermediate goo
Note that, we assu
in activity 2 are pe
the exposition, an
results. What is im
using internation
labour in activity
are perfect substit
out to give rise to
there may be othe
gives rise to a non
the unit cost of
2 In order to be able
returns to scale (i.e.,
example, owing to a fixed cost of international outsourcing. However, even in

cases where an increase in the use of international outsourcing gives rise to only
a marginal decrease in the use of labour, the effects of international outsourcing
that we find in this paper will still be present. The difference is that it becomes
more difficult to distinguish sharply between the effects of a threat of using
international outsourcing and the effects of realized international outsourcing.
The profit of the firm (H) is given as the value of total production (Q) minus
the cost of labour (wL) and international outsourcing (pZ); that is,
II = Q - wL- pZ. (5)

2.3. The labour market
The workers are organized in a trade union that is assumed to be utilitarian
that is, it seeks to maximize the sum of the utilities of its members. Because of
the linear utility function of consumers (i.e., (1)), the objective function of the
trade union can be expressed as
UT = wL + (MT - L)W, (6)

where UT is the payoff to the trade
time of trade union members, and W
With respect to wage determination
e.g., Nickell and Andrews 1983) in wh
ations between the firm and the trad
firm unilaterally determines employ
negotiations is assumed to be determ
e.g., Binmore, Rubinstein, and Wol
( Ts - 0-s
NP= U-U (HII O<s<11 (7)
where UT (TI) is the payoff to the trade

s may be interpreted as the bargaining pow
there is no production in the firm, impl
value of leisure (i.e., UT= MT`w), and the
The bargaining parties seek to maxim
the wage bargaining is given as
w = arg max NP. (8)
It should be mentioned tha

trade unions whether to
efficient bargaining model
employment as well as th
'disadvantage' of the wage b
whereas, the 'disadvantage'
84 J.R. Skaksen
is not on the labour demand curve, implying that the firm has an incentiv
choose an employment level other than the one that was agreed upon
bargaining with the trade union. Since a central ingredient of our model i
international outsourcing can be used as a threat by the firm in the
bargaining, we assume that the firm has a right to manage and there
right to reduce employment if international outsourcing becomes more prof
It is straightforward to compare the outcomes of the efficient bargaining a
bargaining models. In the efficient bargaining model, the union and the firm
agree to use international outsourcing only if the cost of international out
cing is below the cost of in-house production in terms of the marginal val
leisure. Hence, improved possibilities for international outsourcing wo
affect the relative strength of the firm and the trade union.
2.4. Game structure

The structure of actions in the model can be described as a sequential ga
evolving over three stages. In stage 1, the firm and the trade union bargain ov
the wage rate. Whereas, in stage 2, the firm unilaterally decides on the level o
international outsourcing and employment.
As discussed in the introduction of this paper, it is an important assumptio
that wage bargaining takes place before the firm makes a decision concern
international outsourcing. This implies that potential outsourcing in stage
becomes a threat against employment in activity 2 if the wage rate becomes to
high, and, as demonstrated below, this threat has important implications
the outcome of the bargaining in stage 1. The case where wage bargainin
takes place after the firm has decided whether to use international outsourcin
is to some extent covered in Skaksen and Sorensen (2001). Both cases
realistic, and which one is most relevant depends on to what extent the firm h
to invest in new capital in order to exploit international outsourcing.
3. Solving the model
It is well known that, in order to get a subgame perfect equilibrium, a tw

stage game is solved by backward induction. Therefore, we start by considerin
stage 2 of the game, and then we turn to stage 1.
3.1. Stage 2
In stage 2, the wage rate is given (from stage 1). Hence, the firm maximizes th
profit (i.e., (5)), for given values of the cost of international outsourcing (p) an
the wage rate (w), and it turns out that the demand functions for labour
the intermediate good produced abroad become
N + H = (K1 K+ K2)w-z, if wp
N = K1 wa---p2-f-, if w > p (9)
Z 0, 1if w p
14 - 3 a 1-a
where K1 = a-a-jp37 , and K2 = -a-0,3-ap . We see that, if the wage rate is

below the cost of outsourcing (i.e., w <p), the firm uses domestic labour in
both activities, and there is no outsourcing (i.e., Z= 0). If the wage rate is
above the cost of outsourcing (i.e., w >p), the firm employs only domestic
labour in activity 1, while there is outsourcing of activity 2.
3.2. Stage 1
In stage 1, the wage rate is negotiated between the trade union and the firm,
and the bargaining parties realize that, in stage 2 of the game, labour demand
and demand for the intermediate good produced abroad will be determined as
in (9) and (10). The outcome of these negotiations is assumed to be the wage
rate that maximizes the Nash Product (see (8)). By solving this maximization
problem, we find that (see the appendix for details)
1- 1 + if pp>
S= W 1 + , if p < p <
{ W3?W(l ?) if s<p, (11)
where p and p are defined in
* Ifp > p, the possibility of in

of the wage bargaining.
* If p < p, the firm outsource
It turns out that p becomes
( s(1 -a- )) (12)

while p is implicitly determined f
a+P p1- 1-a
s(1 -a-) -3) -s- s( -a-) s (13)

1 +. (13)
(Note that in the appendi
In expression (11), i1 is t
outsourcing (p) is above p
outcome if p is in an inte
86 J.R. Skaksen
We see that, if the cost of international outsourcing is sufficiently

(i.e., p > p), it is as if international outsourcing is impossible, and the exact
of international outsourcing has no impact on the wage rate (i.e., Oil /Op =
If the cost of international outsourcing is in an intermediate r
(i.e., p < p <p), the cost of international outsourcing is sufficiently low
if the wage rate was fixed at W'1, the firm would choose to outsource in s
of the game. The bargaining parties know that this is the case, and in orde
keep employment in activity 2 in house, the trade union accepts that the w
rate becomes sufficiently low to prevent international outsourcing. Hence,
wage rate is chosen to be equal to the cost of outsourcing (p), which
highest possible wage rate if outsourcing is to be prevented in stage 2.
Finally, if the cost of international outsourcing is sufficiently low (i.e.,
the trade union is unwilling to accept a wage rate which prevents outso
in stage 2 of the game. Hence, it is as if the wage bargaining involve
workers employed in activity 1.
By comparing the three possible levels of the wage rate, we find that
W2 < W1 < W3. (14)
We note that i2 depends

of the wage bargaining (
W2 < W1, because, as lon
sufficiently low to preve
Hence, it accepts a wage
outsourcing was not a poss
It is also quite obvious
becomes sufficiently lo
wage rate sufficiently
discontinuous upward
above p to a level just
p < p, it is interesting t
wage rate if the firm be
The reason why W1 < W
p < p), the elasticity of t
than if there is employm
employment becomes l
if there is no employme
an increase in the wage
if there is employment
trade union has success i
in activity 2.3
3 This wage-increasing effect of international outsourcing is also found in Skaksen and Sorensen
(2001).
4. Implications of international outsourcing
In this section, we make comparative analyses with respect to the implications

of international outsourcing. However, since the decision of international
outsourcing is determined endogenously by the firm, we consider how the
solution of the model depends on the cost of outsourcing (i.e., p), which is
an exogenous variable. Recall that Z is the quantity of the intermediate
input outsourced. By inserting the wage rate, which is the outcome of the
wage bargaining (i.e., (11)), into the demand function for Z (i.e., (10)), we
find that
0,7 if p >p,
K2(W(1 + p)-a-,f if p < p. (15)

It is obvious that international outsourcing takes p
international outsourcing is sufficiently low (i.e., p < p
tional outsourcing takes place, the amount of outsou
cost of outsourcing (i.e., OZ/Op < 0 if p < p).
By inserting the wage rate found in (11) into the
(i.e., (9)), employment is found to be
L= -1
L =L,
L2= (Kl
(KI ++ K2)pl-
K2)W (1-7,+s
ifap--,
p<j3 ,if
L3 = KiW-p-A--(1 + s I)- )-Ia-
where L1 is employment if the cost of outsourcing is su
if outsourcing is impossible (i.e., p > p). L2 is employ
sourcing is in the intermediate range (i.e., p < p < 5), w
is used as a threat to put downward pressure on the
employment if the cost of international outsourcing
outsourcing actually takes place (i.e., p < p).
If L = L1, employment is independent of the exact va
If L = L2, a decrease in the cost of outsourcing im
becomes even lower, and this in turn gives rise to an
(i.e., OL2/Op < 0). Finally, if L = L3, an increase in p
becomes more costly and that both production and
(i.e., 9L3/Op < 0).
Even though employment is decreasing in p if L =
there is a discontinuous downward jump in employm
level just above p to a level just below p; that is,
L3 Ip= p< L2 p= p ? (17)
88 J.R. Skaksen
This result simply reflects that, if p <p (i.e., L= L3), the firm choos
outsource activity 2, while this is not the case if p > p (i.e., L = L2).
Turning to the welfare implications of international outsourcing, we fin
using the definition of aggregate welfare (i.e., (2)), that
W1 = Kw-- 1? + 1 + s(-a-0) (a +/3)

+WM, if p> p
W=K(p-(a+p) -1 M, if pp<
W2 = K p - (a- +-s(l
m)wp-)-- I" C(7
+ WM, if p_<p<p
W3= K1W-a-p-a-,) ((1 - 13)( + s(1-a
1)+ M) I-a---
a -a +l -a
+WM, if p < p, (18)
where K = KjK23 and K1 and

Aggregate welfare is determ
(i.e., p >]5), as W2 if the cost
(i.e., p < p < p), and as W3 if
If p > i, it is as if outsourcing
p (i.e., aW,/1p = 0). If p <p <p
outsourcing. Under these circ
rate decreases, and, since the
wage-bargaining power of th
&W2/Op < 0). Finally, if p <p
because an increase in p impl
an external supplier becomes
If we compare the welfare l
international outsourcing, we
national outsourcing is suffic
wage rate (i.e., W= W2), there i
case where potential outsourc
the reason being that the ineff
With respect to the compariso
W3 [p=p< W2 p=p. (19)

Hence, there is a discontinuous down
decreases from a level above p to a le
discontinuous downward jump in welf
outsourcing implies that the firm outso
why this is the case: the increase in the
outsourcing starts taking place. As ar
over the wage rate implies that the wag
the discontinuous increase in the wage r
On top of that, outsourcing as such tends to give rise to a lower welfare. This is
so because, at the cost of outsourcing where the firm begins to outsource
activity 2 (i.e., p), international outsourcing is more costly for society than it
is to keep activity 2 inside the country. For the firm, international outsourcing
is optimal if the wage rate is higher than the cost of international outsourcing.
Whereas, from a social perspective, international outsourcing is optimal only
if the cost of outsourcing is below the marginal value of leisure (i.e., w). Since
it is always the case that the wage rate is above the marginal value of leisure
(i.e., W > W), it follows that, if a marginal decrease in p implies that the firm
begins to outsource activity 2, there is a discontinuous downward jump in
welfare.
Since the economy is populated by capitalists and workers, it may also be of
interest to consider how international outsourcing affects each of these two
groups. By using the profit expression (i.e., (5)), we find that:
)-(a+/3)
II1 = (K - K1 - K2)wi-- 1 + s
II = 112 = (K- K1if- pK2)pl-a-

___ ,
,
if p <_ p <,
113 = (K-if
KI - K2)l-a-flp-a1
p +< S a),(20)p. (20)
As in the expression for
113 are the profits if the
and low, respectively. If
rate, implying that the p
the profit is decreasing in
ing in p. Finally, if p < p,
purchases the intermedi
by comparing 12 and II3
113 p=p< 112 Jp=p . (21)
This result shows that, if a margin

that the firm begins to outsource
jump in the profit. This is so becau
realize that, even though the fir
source, the firm still maximizes it
could become better off if the firm
if w > p), and the trade union co
lower than Q3. However, such a p
stage 2 of the game, the wage rat
firm to outsource activity 2. The t
90 J.R. Skaksen
the outcome of the wage bargaining is '3, which implies that there
international outsourcing in stage 2.
Turning to the payoff to the trade union, we find by using (6) that
UT - (KI + K2) w~ -a- S 1 + S ,- MT,

if p_>p
U - UT2= (K1 +K2)l- - I+WMT,
-/o+- _ 1-a-p if p<p<p
U3T= KlWIap s a (1 + s - +WM
if p < p, (22)
where UIT, UT, and U

potential outsourcing d
the trade union is inde
equal to p in order to
sourcing, and it can be
the trade union is inc
international outsour
that employment is r
union (i.e., OU/TlOp <
Finally, we note that
U3T Ip=> UfT p=p. (23)

Hence, there is an upward jump in the payoff to th
decrease in the cost of outsourcing implies that
As argued above, outsourcing implies that there is
but there is also an increase in the wage rate, an
effect is dominating, and the trade union becom
of this result is that the trade union does not
would prefer, because the firm also has bargaining
union is better off if the wage rate is higher,
reduced.
- +/3) 1 -1)-a-0
OP = BI-a-, WP
Op 1 -- 1-a -
This expression is positive if
a+1
p<wand, by usingp is smaller than , this is easily seen to be the case.
and, by using p is smaller than i1, this is easily seen to be the case.
5. Conclusion
In this paper, we have considered the implications of international outsourcing

when the labour market is unionized. We have seen that we have to distinguish
between the implications of potential but non-realized outsourcing an
realized outsourcing.
Potential but non-realized international outsourcing can be used as a threa
by the firm in the wage negotiations with the trade union. Under these
circumstances, a marginal decrease in the cost of international outsourcin
implies that there is a decrease in the wage rate and an increase in employment
and aggregate social welfare. The welfare distribution also changes as capita
owners gain, while the trade union becomes worse off.
With respect to the implications of realized international outsourcing, w
find that a marginal decrease in the cost of international outsourcing, whic
implies that the firm actually begins to outsource activities, gives rise to a
increase in the wage rate and a reduction in employment and aggregate soci
welfare. In this case the welfare distribution is also changed, but it is the capita
owners who become worse off, while the trade union becomes better off.
These results all assumes a marginal decrease in the cost of internationa
outsourcing. A non-marginal decrease in the cost of international outsourcing,
which implies that the firm begins to outsource activities, has ambiguou
effects on aggregate welfare and the distribution of welfare. However, w
want to emphasize the difference between potential, but non-realized, interna-
tional outsourcing and realized international outsourcing. In empirical work
is obviously much easier to get information on realized international outsourc-
ing than on potential but non-realized international outsourcing. But by
focusing only on realized international outsourcing, we may miss some of t
most important implications of improved opportunities for international ou
sourcing, namely, that it effectively changes the relative bargaining power
firms and trade unions.
Appendix
First, we recall that p and p are defined in the following way.
* If p ? p, the possibility of international outsourcing does not affect the outcome

of the wage bargaining.
* If p <p, the firm outsources activity 2.
Since domestic workers are unwilling to work at a wage below W, we know that
p exists.
thatIf p _ p, it follows from the definition of p that w _ p, and from (9) it follows
92 J.R. Skaksen
L = (K1 + K2)wa-,-. (Al)

By using (5), (6), and (7) in (8), it follows that
W1 - s+1 a ). (A2)
As long as '1 < p, i1' is the wage rate that maximizes t
Therefore, the lowest p consistent with (A2) being the out
bargaining (i.e., p) is
( s(l - a -) (A3)
If p < p, it follows from the definit
that
L = K1 w --p - . (A4)
By using (5), (6), and (7) in (
W3 = 1 + s( - a . (A5)
If p : p <p , it follows from the definition
does not take place, and, therefore, w < p
L = (K1 + Kz)w-C-. (A6)

Given that international outsourcing
maximizes NP. Since p <jp and p- = i

outsource activity 2 if the wage rate
definition) international outsourcing
must be that case that w < Wi1. Since
NP and NP is increasing in w when w
bargaining parties determine the wag
the restriction that w _ p. It follows that the wage rate maximizing NP is

W2 = P. (A7)
Finally,
assume wefollowing),
in the have to determine p. As
we know that ' = 2long
= p. as
If p
p <_p
p, (and p <p,that
we know which we
S = W3. Since the bargaining parties seek to maximize NP, it follows that
* ifp >p: w = W2 = p maximizes NP;

* ifp <p: w = w3 > p maximizes NP.
p =p is the value of p for which the bargaining parties are indifferent between
W2 and i3. Hence:
NP =
w=w2, =P W=W31P=P NPI (A8)
By using (5), (6), (7), (A5) and (A7) in (A8), we find t
following condition:
a+ 1
s(1 - a - -)
If we insert p = P, the righ
left-hand side, and if we
unambiguously larger than
right-hand side are contin
satisfying the condition in
In the derivations above
tion to be satisfied, it mus
if w = i'3. By using (5), (6
a+ -s 1 s-
> 1+ s(1--a - ) -s- s1- 0) P (Al0)
By inserting p found in (A3), it follows that the condition in (A10) is satisfied if
s> 0 (if s=0, the labour market is competitive, and it can be shown that
P=P = W).
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International Outsourcing When Labour Markets Are Unionized

Author(s): Jan Rose Skaksen

Jan Rose Skaksen Department of Economics, Copenhagen

Abstract. We consider the implications of international outsourcing in a simple

La sous-traitance internationale quand les marchds du travail sont syndiques. L'au

Canadian Journal of Economics / Revue canadienne d'Economique, Vol. 37, No. 1

0008-4085 / 04 / 78-94 / ? Canadian Economics Association

Recently, the economic implications of globalization have been a topical issue

trade in final goods, while we consider international outsourcing. Another

In this section, we set up a model of a game between a representative firm an

Ui = yi + W(m - li), (1)

where yi is the income (equal to

W = II + wL + W(M- L), (2)

example, owing to a fixed cost of international outsourcing. However, even in

II = Q - wL- pZ. (5)

UT = wL + (MT - L)W, (6)

where UT (TI) is the payoff to the trade

w = arg max NP. (8)

It should be mentioned tha

2.4. Game structure

3. Solving the model

It is well known that, in order to get a subgame perfect equilibrium, a tw

where K1 = a-a-jp37 , and K2 = -a-0,3-ap . We see that, if the wage rate is

where p and p are defined in

* Ifp > p, the possibility of in

It turns out that p becomes

( s(1 -a- )) (12)

a+P p1- 1-a

s(1 -a-) -3) -s- s( -a-) s (13)

We see that, if the cost of international outsourcing is sufficiently

W2 < W1 < W3. (14)

We note that i2 depends

4. Implications of international outsourcing

In this section, we make comparative analyses with respect to the implications

K2(W(1 + p)-a-,f if p < p. (15)

L3 Ip= p< L2 p= p ? (17)

W1 = Kw-- 1? + 1 + s(-a-0) (a +/3)

where K = KjK23 and K1 and

W3 [p=p< W2 p=p. (19)

II = 112 = (K- K1if- pK2)pl-a-

113 p=p< 112 Jp=p . (21)

This result shows that, if a margin

UT - (KI + K2) w~ -a- S 1 + S ,- MT,

where UIT, UT, and U

U3T Ip=> UfT p=p. (23)

In this paper, we have considered the implications of international outsourcing

First, we recall that p and p are defined in the following way.

* If p ? p, the possibility of international outsourcing does not affect the outcome

L = (K1 + K2)wa-,-. (Al)

L = (K1 + Kz)w-C-. (A6)

maximizes NP. Since p <jp and p- = i

the restriction that w _ p. It follows that the wage rate maximizing NP is

* ifp >p: w = W2 = p maximizes NP;

Huizinga, H. (1993) 'International market integration and union wage barg

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