The Rise of Domestic Outsourcing and the Evolution of the German Wage Structure

Authors

Deborah Goldschmidt, Boston University
Johannes Schmieder, Boston University

Publication Date

12-3-2015

Series

Upjohn Institute working paper ; 15-244

**Published Version**

In The Quarterly Journal of Economics, 132(3): 1165–1217

DOI

10.17848/wp15-244

Abstract

The nature of the relationship between employers and employees has been changing over the last three decades, with firms increasingly relying on contractors, temp agencies, and franchises rather than hiring employees directly. We investigate the impact of this transformation on the wage structure by following jobs that are moved outside of the boundary of lead employers to contracting firms. For this end we develop a new method for identifying outsourcing of food, cleaning, security, and logistics services in administrative data using the universe of social security records in Germany. We document a dramatic growth of domestic outsourcing in Germany since the early 1990s. Event-study analyses show that wages in outsourced jobs fall by approximately 10–15% relative to similar jobs that are not out-sourced. We find evidence that the wage losses associated with outsourcing stem from a loss of firm-specific rents, suggesting that labor cost savings are an important reason why firms choose to contract out these services. Finally, we tie the increase in outsourcing activity to broader changes in the German wage structure, in particular, showing that outsourcing of cleaning, security, and logistics services alone accounts for around 9 percent of the increase in German wage inequality since the 1980s.

Issue Date

September 2015

Sponsorship

W.E. Upjohn Institute for Employment Research Early Career Research Award 14-147-08

Subject Areas

LABOR MARKET ISSUES; Employment relationships; Temporary employment; Wages, health insurance and other benefits; Inequality