Competition, Ownership, and the Impact of Government Outsourcing on Employees

Abstract

Government outsourcing to third-party vendors is widespread and intended to strengthen the organizational incentive to deliver public services more efficiently. However, it is unclear how outsourcing influences the public workforce, and little is known about the effect on employees who change from working for the government to working for the vendor receiving the outsourcing contract. In this article, we theoretically argue that the introduction of competition and private ownership in public service delivery may have negative consequences for employees’ remuneration, employment, and health outcomes. We assess these arguments using unique individual-level register data of 1,478 Danish relatively low-skilled employees who changed job from public to private employment due to government outsourcing. Using a difference-in-difference (DiD) approach, we estimate the effect on employees’ remuneration, employment and income transfers, and use of health services compared to an exact matched control group of public employees who did not experience outsourcing. Our findings suggest that outsourcing significantly decreased employee remuneration and employment and increased public income transfers, while the effect on health services use was marginal and transitory. Potential mechanisms explaining these findings include the vendor’s incentive to reduce the workforce and increase productivity, the stress of changing jobs, and poorer person–environment fit. The results suggest that outsourcing has high costs for employees, some of which are passed on to the government itself through increased expenditure for public income transfers. We propose pathways for further theoretical and empirical research on employee consequences of government outsourcing.