Insider-Outsider Theory

The insider-outsider theory is a theory of unemployment (outsiders) who see persistent unemployment as a result of excessive wages for those already employed (insiders). However, as in conventional neoclassical models, this is not the result of excessive union power in wage negotiations. Rather, they are enforced by insiders (the job owners) against the outsiders (the unemployed) because they have cost advantages and thus market power.

Denn aus der Sicht des Arbeitgebers verursacht der Insider einer vorhandenen Belegschaft keine Einstellungskosten (Bewerbersuche, Auswahlverfahren, Verhandlungskosten, Opportunitätskosten) und keine Trainingskosten (Bildung von betriebsspezifischem Human capital, Einarbeitungszeit, Lehrgänge usw.).

In addition, the taker who wants to exchange an insider for an outsider demanding less wages must expect severance payments, age regulations, dismissal protection suits, legal costs, social plans, etc. Because the employer is not interested in a costly exchange, the insider keeps his job and the excessive wages.

In an expanded version of this theory, the insiders strengthen their position of power with the help of works councils and trade unions. Because they can threaten to strike and work according to regulations in order to realize further wage surcharges for the insiders. In this way, the job owners can raise the wage level above the market-clearing level (full employment) and thus create a barrier that prevents new hires and full employment.

However, the insider-outsider theories have not been empirically confirmed. And they do not take into account the fact that unemployment can also be caused by insufficient macroeconomic demand.

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