Firm adjustment, employment and sub-contracting

Abstract

This article analyses the impact of sub-contracting on the labor market and the
inefficiency that may result from it. Sub-contracting is partially associated with the increase in
services employment and the decrease in manufacturing employment in the early 1990s. Thus,
sub-contracting may decrease job quality and incentives to human capital accumulation, since
services tend to value human capital less than manufacturing and have more informal and
unstable labor relations. This scenario may deteriorate if the sub-contracted firms face credit
constraints. Due to the existence of externalities, investment in human capital would be sub-
-optimal even if contracting firms were willing to invest in the sub-contracted ones.

JEL Classification: J23; J81; J01.