What is the insider-outsider theory?

The insider-outsider theory is a New Keynesian economic model which developed in the 1980s, explaining certain disparities in the job market. Insiders are those who already have a job in a company, most of the time a permanent contract and having undergone expensive training. Meanwhile, outsiders are those with unstable jobs or unemployed. The theory considers whether, in a period of wide unemployment, companies would be better off replacing their insiders with outsiders, who would be likely to accept a lower salary. On the other hand, the resources needed to replace insiders can quickly add up. Think of severance packages, hiring processes and training for example. These labour turnover costs often end up being more expensive than the money saved by paying a lower salary.So it’s not really in a company’s best interests to fire its insiders.

Does that mean the insiders are in a position of strength then? Is there any hope for the outsiders then? In under 3 minutes, we answer your questions!

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