Outsourcing can be factor biased, displacing disproportionately either capital or labor inside the firm. Relying solely on the assumption of homogeneous input demand, this paper shows that factor-biased outsourcing leads the capital–labor ratio to respond differently to a change in the price of labor and to a change in the price of capital. Indirect estimates based on a meta analysis of studies since the 1960s, as well as direct estimates using U.S. data for 1963–2016, indicate that outsourcing principally displaces labor and that, consequently, the capital-labor ratio responds 30-80% more strongly to the price of labor than to the price of capital. These findings also help reframe historical disagreements regarding the extent of capital–labor substitution, and they have direct implications for modeling production and cost, implying that capital and labor are not separable from outsourced inputs.


This talk is presented by the Macroeconomics Seminar, sponsored by the Department of Economics with generous gifts given through the Michael Beauregard Fund for Macroeconomics and the Economics Strategic Fund.