In the context of outsourcing, consider the case where domestic labour and foreign labour are almost perfect complements. If there is an increase in the wage paid to domestic labour, then which of the following statements is true?

Question

Quizplus · Accepted Answer

In the context where domestic and foreign labour are almost perfect complements, an increase in the wage paid to domestic labour would lead to a small substitution effect away from domestic labour because firms would slightly adjust their labour mix in response to higher domestic wages. However, the more significant impact would be the scale effect, which would also work away from domestic labour. As the cost of production increases due to higher domestic wages, firms might reduce overall production or outsource more to manage costs, both of which reduce the demand for domestic labour.

In the Context of Outsourcing, Consider the Case Where Domestic