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An Internal Labour Market Approach to Assessing the Gains from Outsourcing

Published online by Cambridge University Press:  01 January 2023

Trevor Stegman
Trevor Stegman*
Affiliation:
School of Economics, University of New South Wales
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Abstract

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This paper considers an aspect of the assessment of net gains from outsourcing, which has received, it is argued, inadequate attention in the analytical and empirical literature: This aspect is the analysis of team productivity, the essential element for the existence of ‘the firm’ in economic theory. The simple model presented here derives from the labour market literature of internal labour markets and insider-outsider models. The net gains from outsourcing within this framework are assessed by comparing the cost saving from production synergies within the administrated internal labour market, with cost savings from exploiting relative wage differentials in the external labour market. This analysis seeks to identify the determinants of the magnitude of these cost savings and provide a framework to allow their assessment to contribute as one facet of the ‘make or buy’ decision.

Type
Current Issues
Information
The Economic and Labour Relations Review , Volume 16 , Issue 1 , July 2005 , pp. 117 - 132
Copyright
Copyright © The Author(s) 2005

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