Outsourcing, Labor Market Frictions, and Employment

We estimate the labor market impacts of Brazil’s 1993 outsourcing legalization using North-South variation in pre-legalization court permissiveness, and comparing security guards to less affected occupations. We find that outsourcing legalization persistently reallocated jobs from older incumbent guards to younger entrants. Total employment of guards and their entry from informality persistently increased, while average demographic-adjusted wages remained constant. Meanwhile, a wave of occupational layoffs displaced some incumbent guards from high-wage firms. The evidence suggests that the rise of non-core activity outsourcing reduced labor market frictions, facilitated by firm-level economies of scale in human resources and spillovers to non-adopting firms.