Contracting Out Public Services Worsens Inequality and Lowers Wages

by Gregory N. Heires

Decision_contract_outContracting out public services—which aims to help the federal, state and local governments save tax dollars—often has a harmful effect on the community, including worsening inequality and lowering wages.

A recent study, “The Decision to Contract Out: Understanding the Full Economic and Social Impacts,” finds that the savings of outsourcing varies widely and often diminish over time. The study, by Daphne T. Greenwood of the Colorado Center for Policy Studies at the University of Colorado at Colorado Springs, concludes that contracting out undermines our democratic principals by leading to corruption and less control over public funds.

“While reducing costs is most often the motive for outsourcing, a growing body of research documents that savings are minimal, on average,” the report says. “It is also not unusual for total costs to be greater when performed by private contracting firms than they were in-house.”

Studies show that contracting out typically leads to short-term savings of 5 to 10 percent. Over time, the savings often diminish because of a lack of competition and other factors. 

Governments cite insufficient savings 52 percent of the time when they explain their decision to abandon contracts. In 61 percent of cases, governments cancel contracts because of inadequate services.

The savings of contracting out are usually achieved by lowering the wages and benefits of workers. That occurs at a great cost for the community, including:

  • a decline in retail sales
  • a worsening of the wage disparity between men and women, and between blacks and whites
  • a reduction middle-class jobs and
  • an increase in the dependency public services.

The push for contracting out began decades ago. The Reason Foundation, a libertarian think tank, was one of the earliest proponents of shifting public assets and spending to the private sector.

States and municipalities picked up the practice in the late 1970s and the 1980s.

Municipalities contact out an estimated 35 percent of services. The federal government has doubled the amount it spends on contracts since 2000, with most of the spending on services.

While contractors reduce costs by paying front-line workers less, their administrative costs are typically higher than in the public sector, where managers often earn less. But the managers of private companies tend to spend less in the community, leading to a siphoning off of profits and taxes elsewhere.

“More money usually flows out of the local economy,” the report says. “That means less spending, especially in retail and dining establishments.”

In many instances, contractors pay their workers so little that they must rely on public assistance for housing, food and medical care. In California, for instance, school cafeteria workers employed by contractors receive an average of $1,743 in public benefits each year.

The report describes a number of indirect effects of outsourcing on government, the economy and workforce.

Historically, the public sector has provided a ladder into the middle class for women and minorities. They are disproportionately hit by the contracting out public-sector work.

“Women of all races, along with African-American males, sought out public employment for more equal treatment than they often found in the private sector,” the study says. “Outsourcing public jobs often lowers wages, takes away benefits and reduces opportunities for advancement up the job ladder—and disproportionately affects the groups who have struggled most to get a foothold in the labor market and the middle class. Maintaining ladders of opportunity is an important part of the promise of America that public decisions can help to maintain.”

Private sector companies have spent decades attacking unions, cutting back on health-care benefits and eliminating pensions. Now contracting out has become a weapon for eliminating “good jobs”—jobs with decent wages and benefits–in the pubic sector.  Indeed, city officials in Colorado Springs described escaping long-term pension obligations as one of the reasons for contracting out there.

Comprehensive information about the workplace safety and health record of state and local contractors is not available, but substantial documentation exists on the record of federal contractors.

A recent U.S. Senate inquiry found that nearly 30 percent of the top violators of federal wage and health laws were federal contractors. The violations resulted in the deaths of 42 workers between 2007 and 2012.

One instance involved a worker who died after being sucked into an industrial dryer at a Cintas Corp. facility in Tulsa. The worker got caught in the dryer while he tried to untangle stuck clothes; he was spun around inside the dryer for 20 minutes at 300 degrees. Cintas had $3.4 million in federal contracts in 2012.

Decades ago, the civil service system was established to combat nepotism, cronyism and corruption. Contracting out undermines civil service by funneling tax dollars to the private sector, where there is less transparency and accountability of tax dollars.

“In addition to having rights to privacy that collide with traditional expectations of transparency and accountability, private providers are generally not subject to conflict-of-interest laws, nepotism statues or ordinances, ethics codes or whistleblower protection for their employees, or restrictions on political involvement,” the study says.

Three examples of these problems:

  • When Chicago considered contracting out its parking meter service for 75 years at a possible cost of $2 billion, it held three days of evaluation without public discussion.
  • Denver awarded a company a contract to run a parkway for 99 years. The contract allows the company to object to mass transit projects and new and improved roads even though the life spans of roads are 45 years.
  • The online posting of a contract for a Texas charter school contained blacked-out paragraphs in 100 of its 393 pages, according to a New York Times article cited by the study.

“The evidence for public control just keeps on piling up,” said Donald Cohen, executive director of In The Public Interest, a resource center on privatization and responsible contracting, commenting on the University of Colorado report. “What we need now at every level of government are policies that reflect what the evidence makes clear and that helps us prevent economic and social harm to our communities.”

Gregory N. Heires is senior associate editor at Public Employee Press, the official publication of District Council 37, which represents 120,000 municipal workers and 50,000 retirees in New York City.  He blogs at The New Crossroads.

Read other Talking Union posts by Gregory Heires.

One Response

  1. I was a union member for 20 years in a public union. Now that private sector unions only serve 8% of workers we are in deep shit. You can slice it any way you want, but workers better get used to being on the dole.

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