Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/336476 
Year of Publication: 
2025
Series/Report no.: 
Working Papers No. 2025-15
Publisher: 
Banco de México, Ciudad de México
Abstract: 
This paper studies the use of domestic outsourcing to circumvent labor benefits and its consequences for firms and workers. Drawing on longitudinal establishment data and employer-employee data from Mexico, we provide evidence that many firms were outsourcing their entire workforce to avoid mandatory profit-sharing. A model shows that the incentive for this practice arises when firms face a labor supply curve that is less elastic to profit-sharing than to wages. We then leverage a reform that restricted outsourcing to assess the model predictions. The reform caused previously-outsourcing establishments to insource their workers and comply with profit-sharing, with no evidence of an effect on total employment. Treated plants partially offset the profit-sharing increase through lower wage growth, yet total worker compensation increased, consistent with our model. Self-collected survey evidence suggests that inelasticity to profit-sharing is partly explained by information frictions among workers, implying that they benefited from the reform.
Subjects: 
Outsourcing
Profit-sharing
Labor Market
Market Power
JEL: 
J08
J41
O12
O14
Document Type: 
Working Paper
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