BREAD Working Paper No. 628, January 2024

Outsourcing Policy and Worker Outcomes: Causal Evidence from a Mexican Ban

Alejandro Estefan, Roberto Gerhard, Joseph P. Kaboski, Illenin O. Kondo, and Wei Qian



A weakening of labor protection policies is often invoked as one cause of observed
monopsony power and the decline in labor’s share of income, but little evidence exists on
the causal impact of labor policies on wage markdowns. Using confidential Mexican economic census data from 1994 to 2019, we document a rising trend over this period in on-site
outsourcing. Then, leveraging data from a manufacturing panel survey from 2013 to 2023
and a natural experiment featuring a ban on domestic outsourcing in 2021, we show that
the ban drastically reduced outsourcing, increased wages, and reduced measured markdowns without lowering output or employment. Consistent with the presence of monopsony power, we observe large markdowns for the largest firms, with the decline in markdowns in response to the ban concentrated among high-markdown firms. However, we
also find that the reform reduced capital investment and increased the probability of market exit


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