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Koskela, Erkki
Poutvaara, Panu
Year of Publication: 
Series/Report no.: 
IZA discussion papers 3699
In European Welfare States, unskilled workers are typically unionized, while the wage formation of skilled workers is more competitive. To focus on this aspect, we analyze how flexible international outsourcing and labour taxation affect wage formation, employment and welfare in dual domestic labour markets. Higher productivity of outsourcing, lower cost of outsourcing and lower factor price of outsourcing increase wage dispersion between the skilled and unskilled workers. Increasing wage tax progression of unskilled workers decreases the wage rate and increases the labour demand of unskilled workers. It decreases the welfare of unskilled workers and increases both the welfare of skilled workers and the profit of firms.
Flexible outsourcing
dual labour market
impacts of labour taxation
welfare state
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Working Paper

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