Domestic outsourcing has been on an upward trend worldwide since around the 1990s, mainly because it reduces labor costs for large employers. Nonetheless, study after study find that it worsens labor market conditions for workers who represent the manpower used to produce the outsourced goods and services. These workers enjoy lower wages and benefits, such as employer-financed health insurance, than their non-outsourced peers. Thus, this trend raises concerns about the role of outsourcing as an additional cause of rising inequality of earnings.
Several governments have responded aggressively to this concern by limiting or banning domestic outsourcing. For instance, as early as 2008, Ecuador prohibited it entirely, and Mexico implemented a similar policy in 2021. Likewise, the tightening of temporary hiring enacted in 2022 in Spain shows that governments worldwide are acting to limit other nonstandard forms of hiring. Despite the increasing spread of these limitations, very little is known about their effects. Do they truly serve their goal and improve workers’ living conditions? Or do they just disincentivize new hires?
We shed light on these questions by studying one of the latest events among this recent wave of bans. In February 2022, the Peruvian government implemented a strict bound on domestic outsourcing: Hiring outsourced personnel to perform the core of the business (the activity by which customers identify the firm) was made illegal. We compare individuals with a high risk of working as outsourced workers, based on their demographics, with another group composed of low-risk individuals before and after the policy. Our first result is that the policy was effective at achieving its primary objective: Its implementation caused outsourcing—the share of outsourced jobs—to plummet by 25% in the first two quarters of 2022.
Next, the policy increased employment rates in total by 2.3 percentage points and decreased unemployment by 0.8. Taken together, this means that limiting outsourcing increased labor force participation by 1.5 percentage points. Thus, it seems that the concerns related to the potential dis-employment effects of this policy have no grounds—quite the contrary.
Moving on, we investigate if limiting domestic outsourcing improves workers’ well-being. We find no evidence of this, beyond a small and short-lived increase in real wages that disappeared two quarters after the policy was implemented. Similarly, there is no evidence suggesting that the extent of informality in the labor market changes when outsourcing is limited.
Our findings are optimistic in that it seems that restricting outsourcing does not lead to employment destruction, a fear raised by policymakers worldwide. They also show, however, that this policy is no silver bullet. We do not detect material improvements in wages or labor formality. Our examination is necessarily short-term, given when the policy was implemented. Further research will need to examine whether and, if so, for how long these short-term findings persist in the medium- and long-term.
© Bruno Jiménez and Silvio Rendon
Bruno Jiménez is a pre-doctoral fellow in economics at Princeton University, USA.
Silvio Rendon is Executive Director at the Inter-American Development Bank and a Research Fellow of IZA.
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