An excellent new study by In the Public Interest, Race to the Bottom: How Outsourcing Public Services Rewards Corporations and Punishes the Middle Class, makes the important connections between outsourcing public services and public-sector jobs, the shrinking of the American middle class, and the increase in economic inequality in the United States.

Throughout much of American history, one of the roles of government has been to increase labor standards, thereby improving our quality of life. Government has often led the way in raising wages, providing important benefits like pensions and health care, and breaking down the barriers to opportunity by adopting anti-discrimination and affirmative action policies. But over the last couple of decades, calls for greater outsourcing in the name of efficiency and cost-savings have resulted in a hollowing out of the opportunities that public-sector work used to provide. This undermines the middle class and widens the divide between the wealthy and the rest of us.

Race to the Bottom outlines the successes of strong government standards in creating a ladder of opportunity that particularly benefits people of color, women, and less educated workers. According to the report, “African-Americans are 30% more likely than non-African-Americans to work in the public sector” and “African-American public sector workers earn 25% more than other black workers.” Public-sector jobs also help workers with less formal education to establish their place in the middle class: “Workers with only a high school degree receive on average 6% more in wages and benefits in the public sector than the private sector. Similarly, workers with a few years of college, but no degree, receive 9% more in the public sector than in the private sector.”

Dramatic cuts to labor costs are characteristic of privatization contracts when public-sector work is shifted to for-profit corporations. Race to the Bottom provides harsh details of this reality. When the jobs of school custodians in Chelmsford, MA were privatized, they saw their wages cut from $19 an hour (a respectable middle-class income of nearly $40,000 a year) to between $8.25 and $8.75 an hour (just $18,000 a year), barely above the poverty line.

Nationally, the median annual wage for state corrections officers was $38,850, more than $10,000 more than the average $28,790 earned by corrections officers who worked in for-profit prisons. In Texas, the lowest-paid state corrections officer made $26,000, $2,000 more than the highest-paid corrections officer at any of the state’s private prisons.

Middle class wages help build stable, strong communities. They mean workers can afford to live in the places they work; more money is circulated in those communities, which in turn creates and sustains more jobs. When for-profit contractors slash wages, workers often can no longer afford to live in the communities where they work. When workers are forced to move away from the places where they work, the payroll dollars circulating in the local economy shrink from 49 percent of total payroll to just nine percent, according to Professor Daphne Greenwood of the University of Colorado. Local businesses suffer and more community-based jobs are put at risk. Privatization may save a few dollars in the budget, but it can create far bigger problems and negative long-term effects on local economies and local government budgets.

When private contractors cut wages, their employees may have to turn to public assistance to make ends meet. “School cafeteria workers working for contractors in California received an average of $1,743 annually in public assistance because of their low pay.”

In addition, when wages are cut, more experienced workers leave their positions, turnover increases, training and recruitment costs rise, and productivity falls. This, combined with reduced training dollars invested by for-profit contractors, results in reduced productivity and lower-quality public services. The public also often loses relationships with beloved public servants like cafeteria workers, school custodians, and home care workers.

Race to the Bottom profiles six large, publicly traded companies that are leaders in the privatization of public services. Three of these firms are owned by foreign corporations, making it even less likely that their profits will recirculate in American communities (Compass North America (British), Sodexo (French), and G4S Secure Solutions (British)).

Two of the firms are organized as real estate investment trusts, which don’t pay any corporate income taxes on profits distributed to shareholders. As a result, prison privatizer Corrections Corporation of America had an effective corporate tax rate of 8.1 percent in 2013, while over the last three years, Geo Group paid just 2.2 percent of its $259 million in reported U.S. profits in federal income taxes (in 2013 alone, GEO Group received a tax refund of $26.8 million, despite reporting $71.7 million in U.S. profits).

The sixth firm, Aramark, brought in $18.5 million in U.S. income in 2013, but it paid just 14.8 percent in federal corporate income taxes, less than half of the 35 percent posted tax rate for corporate profits.

Solutions

Race to the Bottom argues for several reforms that governments at all levels can adopt to assure that privatization contracts do not cut workers’ wages and pull the rug out from under America’s middle class:

• Require contractors to show that cost savings come from increased efficiencies and innovation, not a decrease in worker pay.


• Require contractors to pay a living wage and provide health and other important benefits.  President Obama has ordered all federal contractors to pay their employees at least $10.10 an hour, but this order does not cover the nearly 20 million Americans who work for state and local government contractors (14.5 million full-time and 5 million part-time workers).


• States and local governments should track how much money is spent on private contracts, how many workers are employed by those contracts, and worker wage rates. This information should be available to the public via online database.


• Conduct a social and economic impact analysis before outsourcing. This allows policymakers to measure outcomes against promised benefits. Among the items that In the Public Interest encourages policymakers to focus on are: the impact on wages of affected workers, requirements that contractor employees live in the community, and the expected impacts on social service and public assistance programs.