Labor Markets and the Rise of Contractor Firms

Abstract: This paper examines how competition among contractor firms affects wages of both outsourced and in-house workers. Using matched employer-employee and fiscal data for France (2009–2021), I document substantial heterogeneity in outsourcing across labor markets: while the average share of employment at contractor firms remains stable, markets where outsourcing was already prevalent experience significant increases. This rise is driven mainly by a surge in the number of contractor firms, generating variation in employment concentration that affects wages and firm profitability. Exploiting a shift-share instrument based on firms’ initial employment composition, I find that a one-standard-deviation increase in exposure to outsourcing reduces contractor firms’ profit margins by about 13 percentage points and outsourced workers’ hourly wages by roughly 4%. In contrast, non-contractor firms benefit from stronger competition in the outsourcing market, experiencing higher profits, employment, and wages. To interpret these patterns, I develop a search-and-matching model with endogenous outsourcing and imperfect competition among contractor firms. Firms choose between outsourcing and in-house production given heterogeneous fixed costs, while contractor firms compete à la Cournot. The model shows that when fixed costs are high relative to in-house productivity, outsourcing becomes widespread and reductions in cost dispersion further expand outsourcing by lowering the price elasticity of demand. A competition shock through lower entry costs sharply reduces markups but ultimately increases wages because the rise in firms’ surplus outweighs the negative effects from lower vacancies and changes in job composition.

Presentations: Macro Seminar (PSE), Séminaire de l'ERUDITE (Créteil University), Brown Bag Seminar of Innovation Economics (Collège de France), Labor/Public Workshop (Sciences Po), 7th QMUL PhD Workshop in Economics and Finance, 24th Journées LAGV (AMSE)

Selected for the IZA@LISER Summer School in Labor Economics 2026

Email me for a draft, at justine.feliu@psemail.eu