The Unequal Distribution of Consequences of Contracting Out: Female, Low-skilled, and Young Workers Pay the Highest Price

Abstract

While the public and private labor markets are marked by significant differences in the institutions of wage formation, very few studies have examined workers’ wages and employment in the public and private sectors when solving the same tasks. Focusing on government contracting out, we examine the change in work income, employment, and government income benefits when public workers are transferred from a public to a private employer due to contracting out. Drawing on theories on wage gaps between the public and private sectors and the property rights literature, we develop novel hypotheses about how individual characteristics of workers moderate the impact of contracting out on workers. Using high-quality individual-level Danish register data, we establish a worker treatment group who experienced contracting out and match them with a similar group of public workers who did not. Difference-in-difference estimation with Coarsened Exact Matching suggests that workers overall experience a significant decline in work income and employment, albeit with major intergroup differences across gender, skills, and age. Our sub-group findings show that female, low-skilled, and younger workers pay the highest price for government contracting out, both in terms of salaries and employment. We discuss how economic theories of public‒private gaps in wage setting can be combined with public administration theories of contract design and monitoring to develop improved — and possibly more equitable — conditions for workers when governments contract out.

Insourcing public services: Consequences for wages and employment

“…While no studies have assessed the impact of insourcing on employees using individual-level data of transferring employees, research on outsourcing illustrates that private ownership and competition are essential to understand employee outcomes of sector shifts (Vrangbaek et al, 2015). For instance, Petersen et al (2021) found that outsourcing had a negative effect on wages and employment (similar findings were reported by Hansen et al, 2022 andSmith, 2022). Other studies suggest that outsourcing has a detrimental effect on working conditions (Park, 2004), job satisfaction (Lee et al, 2019;Yang & Kassekert, 2010), and burnout (Hansen et al, 2009).…”

“…Our application of these theoretical expectations to the reverse process of public sector insourcing suggests positive consequences for employees working under a more low-powered incentive structure. In particular, the beneficial outcomes for female and younger/older workers suggest that policy makers could use insourcing to reverse the decline in work income and employment found in recent mirror-studies of outsourcing (Hansen et al, 2022;Petersen et al, 2021). Productivity is a critical factor for the total expenditures incurred by insourcing public authorities.…”

“…2 While the insourced and private employees are identical in many ways, several matching procedures increase the similarities and create a control group indicative of the counterfactual development for the group of insourced employees. For the sake of brevity, while our approach is not based on random assignment to treatment and control groups, we hereafter refer to insourced employees as the treatment group and those who remained employed by the private contractor as the control group (for a similar approach in an outsourcing context see Hansen et al, 2022;Petersen et al, 2021).…”

“…A possible explanation for male employees' increases in working hours but insignificant development in work income is the more equalitarian wage structure in the public sector. The more equalitarian public wage structure may benefit female employees by reducing the gender wage gap (Hansen et al, 2022), while male employees work significantly more after insourcing without corresponding increases in their work income. We return to a discussion of the implications of these findings in the discussion section.…”

“…Without competitive pressures and prospects of claiming profits, public sector officials have weaker incentives to reduce salaries and increase productivity than private providers (Bel et al, 2010; Petersen et al, 2021). Thus, while outsourcing studies link cost reductions to deteriorating working conditions (Domberger & Jensen, 1997; Hansen et al, 2022; Jensen & Stonecash, 2005), insourcing could have positive employee effects and net welfare benefits due to the reversal of critical cost‐related mechanisms.…”