Domestic outsourcing leads to lower wages and rising wage inequality in Germany


The relationship between employers and employees has changed over the past three decades as firms increasingly rely on contractors, temp agencies, and franchises rather than direct-hire employees. This is particularly true in Germany where domestic outsourcing has grown dramatically since the early 1990s.

To investigate this growth, researchers Deborah Goldschmidt and Johannes Schmeider of Boston University analyzed German social security records and developed a new method to track when a business spins off a group of service workers, such as cafeteria workers, to a legally separate business unit.

Their analysis, appearing in an Upjohn Institute working paper and summarized in a recent "Employment Research" newsletter article, shows wages in outsourced food, logistics, cleaning, and security services fell by 10 to 15 percent relative to similar jobs that were not outsourced. Further, outsourcing of just three services—cleaning, security, and logistics—accounts for around nine percent of the increase in German wage inequality since the 1980s.

Read the working paper: "The Rise of Domestic Outsourcing and the Evolution of the German Wage Structure."

Read the newsletter article: "Domestic Outsourcing Reduces Wages and Contributes to Rising Inequality."

Research Topics: Globalization