Call center workers

Custodians, security guards, and food service workers are rarely central to large employers’ main business. As firms have increasingly chosen to refocus on their “core competencies,” workers in these occupations have been “the vanguard of fissuring” (Weil 2014), among the first jobs that businesses have outsourced.

Extent and Trends

Estimates about the extent of outsourcing of these lower-wage service jobs vary, but all suggest that outsourcing of these occupations is common and has grown over time. Dorn, Schmieder, and Spletzer (2018) document how the share of workers in cleaning and security occupations who report being employed by a business services firm grew from around 2 to 3 percent in 1950 to between 25 and 30 percent by 2015. They find most of this growth occurred in the 1970s and 1980s, with a slowdown in the 1990s and additional growth in the 2000s. An earlier study by Dube and Kaplan (2010) shows consistent patterns, with 22 percent of janitors and 50 percent of security guards working in contracting arrangements between 1988 and 2000. Using high-quality occupational data within firms, Dey, Houseman, and Polivka (2010) find evidence of even greater prevalence by 2000, with almost half of janitors and more than 70 percent of security guards working under contracting arrangements.i

These estimates mostly capture people working for a contracted firm, but outsourcing can also involve independent contractors and freelancers. Katz and Krueger (2019) measure the share of custodial, security services, grounds cleaning, and food preparation workers in any of these alternative work arrangements, including as temps and on-call positions. They find that in 2015, about 17 percent of building and grounds cleaning occupations, 16 percent of workers in protective services occupations, and 12 percent of food preparation workers were in such a contingent work arrangement, with rapid growth over the previous decade for the latter two occupations but little change for the first.ii

Growth of Business Services Firms

The shift by early outsourcers created a new market for companies providing these contracted jobs. According to Weil (2014), increased competition by new firms specializing in these services has led to lower prices, which in turn has increased adoption by large companies. What’s more, the contract firms have also grown large enough to hire their own contract services in a multitiered arrangement of contractors and subcontractors. For example, a hospital may contract out custodial work to a large company that specializes in janitorial services; this company, in turn, may hire a smaller janitorial company to provide the services (Milkman 2006).

Franchising arrangements for support services represent another common way that lead companies distance themselves from lower-wage employees. Weil (2014) profiles several janitorial services companies that specialize in franchising and finds that six large firms account for roughly one-quarter of total industry employment. Many of these large firms—Coverall, Jan Pro, CleanNet—lease their name to much smaller outfits. The food preparation and security services industries have followed a similar trend. Both are dominated by a handful of large, well-known firms: Sodexo, Aramark, and Compass in food preparation and hospitality; and Securitas, Allied Universal, and Group 4 Securicor (G4S) in security services.

Wage Effects

Outsourcing also affects workers’ wages. Berlinksi (2008) finds that outsourced janitors and security guards earned 15 and 17 percent less, respectively, than their in-house counterparts. Dube and Kaplan (2010), using a larger sample and a stronger research design, in which they follow the same individuals as they switch from a lead firm to one specializing in custodial and security services, also find wage penalties from being outsourced. They conclude that outsourced janitors earn about 5 percent less than their in-house counterparts, and security guards earn 20 percent less. Moreover, they show that lead firms that initially paid these workers the highest wage premiums were the ones most likely to outsource these types of workers.

Perhaps the broadest evidence that outsourcing leads to reductions in wages comes from Goldschmidt and Schmieder (2017), who use German social security records, which include worker occupation, to match employees with employers over several decades. They find roughly 1,000 instances of lead firms outsourcing a significant number of their food, custodial, security, and logistic workers to professional services firms in these administrative data. The earnings of affected workers fall between 10 and 15 percent after they were outsourced. Consistent with Dube and Kaplan (2010), larger and higher-paying lead firms were the most likely to outsource. Dorn, Schmieder, and Spletzer (2018) have tried to replicate Goldschmidt and Schmieder’s analysis for the United States using similar data and methods, although occupation is harder to measure. Their preliminary analysis finds that outsourced American workers experience a smaller wage penalty than in Germany, of about 2 to 5 percent.

Outsourcing may affect other elements of job quality besides wages, although evidence is scarce. Weil (2014) argues that outsourcing, and other “fissured” work arrangements, make it easier for employers to violate labor standards and safety regulations. This is of particular concern for the lowest-wage jobs, including custodial, security, and food preparation occupations.

Why Businesses Outsource

It may seem intuitive, especially given the evidence on workers’ wages, that businesses outsource to reduce their labor costs. But this is not necessarily the only reason. Erickcek, Houseman, and Kalleberg (2002) review case studies of Michigan public schools and hospitals that outsourced food service workers and custodial staff. Both types of institutions cited cost savings as a reason for outsourcing. However, some businesses chose not to fully outsource these jobs, but rather outsource only some of them—or use  temporary help workers—and then make selective permanent hires from this group. In addition to this reason of screening for worker quality, the employers also cited a desire to retain some management control over these staff, as well as concerns about safety, given that they serve vulnerable populations. Thus, the decision to outsource need not be predicated only on labor costs, but is likely influenced by other management and operations concerns as well.

References

Dey, Matthew, Susan N. Houseman, and Anne E. Polivka. 2010. “What Do We Know about Contracting Out in the United States? Evidence from Household and Establishment Surveys.” In Labor in the New Economy, eds. Katharine G. Abraham, James R. Spletzer, and Michael J. Harper. Chicago: University of Chicago Press. 267-304.

Dorn, David, Johannes F. Schmieder, and James R. Spletzer. 2018. “Domestic Outsourcing in the United States.” Unpublished working paper.

Dube, Arindajit, and Ethan Kaplan. 2010. “Does Outsourcing Reduce Wages in the Low-Wage Service Occupations? Evidence from Janitors and Guards.” ILR Review 63(2): 287–306.

Erickcek, George, Susan Houseman, and Arne Kalleberg. 2002. “The Effects of Temporary Services and Contracting Out on Low-Skilled Workers: Evidence from Auto Suppliers, Hospitals, and Public Schools.” Upjohn Institute Working Paper No. 03-90. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.

Goldschmidt, Deborah, and Johannes F. Schmieder. 2017. “The Rise of Domestic Outsourcing and the Evolution of the German Wage Structure.” Quarterly Journal of Economics 132(3): 1165–1217.

Katz, Lawrence, and Alan Krueger. 2019. “The Rise and Nature of Alternative Work Arrangements in the United States, 1995-2015.” ILR Review 72(2): 382–416.

Milkman, Ruth. 2006. L.A. Story: Immigrant Workers and the Future of the U.S. Labor Movement. New York: Russell Sage Foundation.

Weil, David. 2014. The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done To Improve It. Cambridge: Harvard University Press.

  • i. All these estimates come from calculating the share of these occupations in certain industries—often employment and business support services—whose main business function is providing specific services to other businesses.
  • ii. Katz and Krueger (2019) use the Contingent Worker Supplement to the Current Population Survey in 1995 and 2005, as well as a RAND survey module they fielded in 2015 that closely mimicked the Contingent Worker Supplement.