Jobs are often outsourced to weaker subcontractors that lack bargaining power

Jobs are often outsourced to weaker subcontractors

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Jobs are often outsourced to weaker subcontractors that lack bargaining power. More power- ful lead firms may pit these suppliers against one another, forcing them to bid down prices, undermining their ability to pay living wages. Or they may dictate the terms of service agree- ments and require short-term contracts. The resulting uncertainty and volatility undermines sub- contractors’ ability to offer stable jobs. Using detailed German administrative data on the universe of workers and firms, Goldschmidt and Schmieder (2015) investigate the effect on wages when jobs are moved from lead firms to contracting firms. They find that wages of employees whose jobs have been outsourced to con- tractor firms fall by about 10 to 15 percent relative to what these same workers were paid prior to outsourcing. They attribute this to the fact that though the same work is being performed and the contribution to output is the same, the outsourced workers earn less because they no longer have access to the economic rents that are specific to the lead firm. The researchers make an especially strong case that wage loss for workers in jobs outsourced to contractor firms is due to their employment by subcontractors by examining situations in which a large employer Figure 1. Relationship between Contracting Out and Employment Status. Source: Bernhardt et al. (2016).
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Appelbaum 521 outsources a group of workers (e.g., cafeteria workers) to a subcontractor but the outsourced workers continue to perform the same job at the same work site as before, yet earn lower wages. These wage losses stem from being excluded from lead firm rents. 4.1. Power relations versus productivity differences Some researchers argue that interfirm differences in worker pay among seemingly similar workers reflect differences in the productivity of workers and hence the firms that employ them. 2 Workers, they argue, are sorted into firms with higher or lower labor productivity. Low-productivity employ- ers with workers with below average productivity will have less latitude to pay above market wages (Card, Rute Cardoso, and Kline 2016a, 2016b). The study examined the gender wage gap, and found that women earned lower wages in part because women “tend to be employed at less productive firms that pay low wages to everyone” (Card, Rute Cardoso, and Kline 2016b: 3). Like most studies of labor productivity, this study actually estimates labor revenue productiv- ity—that is, the researchers use revenue as a proxy for output. This creates a problem for inter- preting their results. When power relations among firms in a network play a role in determining how much revenue each firm receives, it is impossible to determine to what extent higher labor revenue productivity is due to greater productive efficiency of the firms’ workers or to the greater ability of their employer to lay claim to jointly produced value. It is, thus, not possible to con- clude that the rise in interfirm inequality is primarily about high-productivity firms leaving the rest behind. In the case of firms in a production network, it is about the ability of the lead firm to
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