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What is the insider-outsider theory in economics?

The insider-outsider theory is a theory of labor economics that explains how firm behavior, national welfare, and wage negotiations are affected by a group in a more privileged position. The theory was developed by Assar Lindbeck and Dennis Snower in a series of publications beginning in 1984. The...

What is the difference between insiders and outsiders?

The insiders are those incumbent workers who enjoy more favorable employment opportunities than the outsiders. The reason for this disparity is that firms incur labor turnover costs when they replace insiders with outsiders. Examples of labor turnover costs are the costs of hiring, firing and providing firm-specific training.

Why is it important to balance between insider and outsider employment?

When insiders are able to exert their influence properly, unemployment actually rises and becomes permanently higher because they can prevent outsiders from gaining access to positions. That is why a balance between insider employment and outsider employment is often necessary. What Happens When Balance Is Achieved?

What are the advantages of the insider employees?

The insider employees benefit because the bidding process for wages is eliminated when outsiders are not vetted for hire. When workers are unemployed, there is a certain willingness to work at a wage that is lower than the wages that currently exist for insiders.

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