How Domestic Outsourcing Affects the Labor Market

Abstract: In this article, I focus on a few ways domestic outsourcing affects our understanding of the labor market. Jobs filled and emptied by temporary workers are never included in the official tally of job creation and job destruction, which leads to significantly underestimating the magnitude of labor market flows. Domestic outsourcing also changes the interpretation of firm reactions to productivity changes, as well as the magnitude and meaning of a secular decline in measures of labor market dynamism such as the job reallocation rate. Outsourcing is important for plants in modifying their workforces in response to productivity shocks. Plant-level outsourced employment adjusts more quickly and is twice as responsive as payroll employment to changes in productivity. These business-level implications have significant aggregate consequences.

Keywords: domestic outsourcing; labor market; productivity;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Richmond Fed Economic Brief

Publication Date: 2023-11

Volume: 23

Issue: 36