Suppose the production of some good gets outsourced. Outraged, locals ask their government to retaliate, and one obvious policy is to impose a tax on the firms doing this outsourcing. Is this a good policy?
Subhayu Bandyopadhyay, Sugata Marjit and Vivekananda Mukherjee study the case in which this good is an input. Quite obviously, if the incriminated firms are particularly labor-intensive, this tax will actually hurt wages, which plays against the initial intentions. But they show this can hurt local wages even if the sector is capital-intensive if the outsourced good is an intermediate input. The reason is that the final good sector may be labor intensive and the higher costs of inputs hurts it.
Does this actually matter? I have a hard time coming up with a relevant example. One would need to find a country where a capital intensive intermediate good was outsourced and imported to be used in a labor-intensive sector. Usually, one outsources the production of labor-intensive goods, to import them for use in capital-intensive sectors, i.e., the exact opposite of what Bandyopahya, Marjit and Mukerjee have in mind. So why write this paper?
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