1 . The Role of Profit Sharing in Dual Labour Markets with Flexible Outsourcing

We analyse the following question associated with flexible outsourcing under partly imperfect dual domestic labour markets, where skilled workers participate in a firm’s profit: First, how does the implementation of profit sharing influence flexible outsourcing and low-skilled wage and thus how does it affect employment? Second, how do the outsourcing costs affect the low-skilled wage? We show that profit sharing has a positive effect on the low-skilled wage and thus an outsourcing enhancing character. Also higher outsourcing costs will increase the low-skilled wage, so that higher costs for external procurement and profit sharing will decrease the wage dispersion. On the other hand, the employment effect of profit sharing is ambiguous, since there is an employment reducing effect due to higher wage, which can be offset by the employment increasing effect of higher effort. Jan König Erkki Koskela School of Business & Economics Department of Economics Freie Universität Berlin University of Helsinki Boltzmanstr. 20 P.O. Box 17 (Arkadiankatu 7) D-14195 Berlin FI-00014 GERMANY FINNLAND [email protected] [email protected] JEL Classification: J31, J33, J51