Wages and contracting out: does the law of one price hold?
Abstract —Wages and contracting out: does the law of one price hold?
Outsourcing or contract companies are paid to perform a task (e.g. cleaning) that a firm wants to (partially or completely) outsource during a certain period of time. The contract company organizes and supervises the work that is carried out by its own employees and bears all the legal responsibilities of the employment relationship. In a competitive labour market, the law of one price holds. Therefore, competition forces the wage of a worker — the price of the labour input — to depend only on the nature of the task to be performed and her skills but not on who employs the worker. In this article, the authors test this hypothesis by comparing the earnings of observationally similar individuals, performing observationally similar tasks but who differ according to whether they are part of an activity organized by an outsourcing company or in-house. In particular, they look at the earnings of cleaners and security guards conditioning on industry of assignment.
The authors find that, conditioning on industry of assignment, cleaners and security guards who participate in activities organized by contract companies earn 15 and 17 percent less, respectively, than workers in those activities organized in-house. These estimates are hardly affected by the inclusion of a set of jointly statistically significant exogenous variables. They expect that most of the productive traits that characterize a task are transferred to the contractor in the process of contracting out a cleaning or security task. Thus, the findings are hard to rationalize by a simple competitive labour market setting where the law of one price holds.
- Author(s)
- Samuel Berlinski
- Year of publication
- March, 2008
- Journal
- British Journal of Industrial Relations
- Volume, Number
- 46, 1
- Pages
- 59-75
- Publisher
- Blackwell Synergy
- Language
- English