Q & A With Daphne Greenwood: How Outsourcing Can Harm Communities

Egregious examples of government contractors fleecing the public abound. But how does the outsourcing of government functions to contractors and the erosion of the public sector affect society?

Daphne T. Greenwood, an economics professor at the University of Colorado at Colorado Springs and director of its Colorado Center for Policy Studies, released a report entitled “The Decision to Contract Out” that aims to grasp the full economic and social impacts of this decades-long phenomenon.

Her report contains this important infographic, which “provides an illustration of how each $100 in public spending is allocated among workers, managers, and profits.” With outsourcing, “the share going to workers is much smaller because the share for ‘overhead’ to pay administrators, profit and taxes has increased.”


Source: Colorado Center for Policy Studies

Thus, Greenwood’s report finds that “Contracting can involve substantially lower wages and benefits for local workers providing services, siphoning dollars away from local economies. Workers making less will spend less in their own communities.” From this, her report states that outsourcing can lead to the following impacts:

  • “Declining retail sales and potential impacts on the housing market”;
  • “Higher wage gaps between men and women, and between blacks and whites”; 
  • “More workers forced to rely on public assistance”; 
  • “Fewer middle class jobs and wages for everyone”; 
  • “Reduced ladders of opportunity for workers at the bottom”;
  • “Perpetuating low incomes for more female‐headed households”; 
  • “A larger share of ‘at risk’ children in lower‐income families”; and
  • “Weakened viability of pension systems for remaining public workers.” 

Before diving into her answers to our questions, Greenwood says it’s important to realize that while “‘privatization’ advocates often argue that market forces assure accountability for contractors,” “once awarded a contract, payments and profits come from public funds, not free market decisions. That’s why outsourcing to private contractors is not really ‘privatization.’”

1) Why should Americans care about outsourcing? How prevalent is it? And what do you think would surprise people the most about it?

Outsourcing has big effects on how your tax dollars are used, citizen control of government, and what happens in labor markets to all workers.

Outsourcing is growing quite rapidly, but it is difficult to get a handle on the exact numbers. The way official labor force statistics are collected hides the many ‘private sector workers’ that are being paid with tax dollars. While the share of government in the economy (GDP) has stayed around 18 percent for several decades, job growth has been 3-4 times faster in the private sector than the public. Some of that comes from outsourcing public work to private contractors.

Without good data on contracted employees from the Census of Governments, I relied a lot on surveys by the Council of State Governments and the International City/County Management Association (ICMA). They ask about the number of services that are contracted out, brought back in-house, considered for contracting, and so forth. But they don’t track the number of workers involved or how their wages and benefits change. I used case studies to get at those.

I think people would be most surprised at how ill-considered some of these decisions are. Secret and rushed negotiations, sloppy cost comparisons, conflicts of interest, and obligating future taxpayers to pay private firms are, regrettably, not unusual. Most governments lack a process or a template for evaluating when a private contractor could actually improve the service, and when the community is likely to suffer. So costs may or may not fall, and when they do, it may be at the price of poor quality or negative impacts on local economic development.

2) What's the relationship between the public sector, outsourcing, and good, middle-class jobs?

First, money usually flows out of the local economy to pay shareholder profits and taxes for companies headquartered elsewhere. Even for a local contractor, if the ‘savings’ come primarily from cutting wages for workers, there is less retail spending. And workers may move out of town to cheaper housing. This can hurt the level of local economic activity.

In addition, while any one decision impacts the pay and benefits of one set of workers, the pattern we are seeing ripples through the economy to affect all workers. In an earlier time, the public sector led the way on the 40-hour work week, paid vacations, pensions, and equal opportunities at work. Private sector employers began to offer these to compete for the best workers. That helped to build a strong middle class in America – one that is now slipping.

Many workers climbed public-sector ladders of opportunity to bring their families into the middle class. That’s been especially true for African-Americans. And the opportunities for women of all races continue to be better in the public sector than the private. Shifting to private contractors helps perpetuate low incomes for minorities and in female-headed households.

3) What are things you would like to see happen? And what is already being done by some governments that you would like to see more of?

I’d like to see the Census of Governments and the Bureau of Labor Statistics collect data that allows rigorous analysis of how workers, citizens, and communities are affected by outsourcing public services to private contractors. But even before that happens, state and local governments can put laws in place to slow down the process, involve citizens, and avoid conflicts of interest. They need to make a practice of carefully comparing the costs and quality from a private contractor with the results in-house. The California code already requires that.

State and local governments also need to look at the broader social and economic impacts – how contracting decisions are affecting community development, economic opportunities, and the accountability of government to its citizens. My report gives examples of how cities, counties, and states are beginning to address this. There are examples abroad (Australia) and right here at home (Montana). The City of Chicago is considering such an ordinance right now. But even when a law is on the books, it is important to hold elected officials accountable for following it! Congress has taken steps to rein in irresponsible contracting at the federal level, but that hasn’t translated into the changes in behavior it should have. People have to care enough to hold their elected officials accountable on this.

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Very informative content ! Going to read more of your articles