Insider-outsider theory of employment

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In labor economics, the insider-outsider theory examines the behavior of economic agents in markets where some participants have more privileged postions than others. The theory was developed by Assar Lindbeck.

The insiders, are those incumbent workers who enjoy more favorable employment opportunities than the outsiders. The reason for this disparity is that firms incur labor turnover costs when they replace insiders by outsiders. Examples of labor turnover costs are the costs of hiring, firing and providing firm-specific training. Insiders may resist competition with outsiders by refusing to cooperate with or harassing outsiders who try to underbid the wages of incumbent workers.

The implications of this behavior for employment and unemployment is that there is absence of wage underbidding even when many unemployed workers are willing to work for wages lower than existing insider wages (normalized for productivity differences).

[edit] References

Assar Lindbeck, Dennis J Snower. The Journal of Economic Perspectives. Nashville: Winter 2001. Vol. 15, Iss. 1; pg. 165, 24 pgs