Domestic Outsourcing and Workers' Bargaining Power in a Simple Production Model

Outsourcing is normally conceived as the result of a cost-minimizing choice of a new technique which also implies a redefinition of the boundaries between firms and sectors. We will argue instead that many outsourcing activities do not necessarily imply technical change and that the phenomenon can be explained by placing it in connection with the radical modification of the way in which wages are set for workers in a wide range of poorly regulated firms and industries. More than as an aspect of the spread of technical progress, outsourcing will be analyzed as an important mechanism through which workers are divided and their bargaining power is weakened, thus changing the outcome of the distributive conflict between profit and wages.