Although unions generally oppose outsourcing, the relatively high public sector unionization rate in the United States has not prevented the growth of outsourcing by federal, state, and local governmentsi. Governments have long contracted with the private sector to obtain certain goods and services, but in recent decades the trend toward outsourcing has accelerated, affecting a wider array of government services. Public outsourcing is visible at all levels of federal, state, and local government agencies (Baig 2017; Chesterman and Fisher 2009; Oman et al. 2003; Ward 2007).
Contracted services have expanded from the basic, such as trash collection (Andersson and Jordahl 2011), to more complex and technical services, such as highway engineering (DeHart-Davis and Kingsley 2005). Much like private sector outsourcing, services are more likely to be contracted out if they are viewed as peripheral to core functions (Grimshaw et al. 2015).
Research on public sector outsourcing has covered the motivations for doing so, cost impacts, public-private gaps, government use of temporary staffing agencies, and effects on workers who remain directly employed by their agencies.
Motivations for Outsourcing
In part because of high unionization rates, public sector jobs have relatively high wages and generous health and retirement benefits, particularly for some blue-collar jobs (Grimshaw et al. 2015). An important motivation for public sector outsourcing, therefore, has been to lower labor costs by outsourcing to contractors with lower wages and benefits.
Some economics studies have argued that public sector outsourcing can cut costs without reducing quality (Andersson and Jordahl 2011; Oman et al., 2003), and adherents of the new public management movement contend that the private sector should run government services in order to encourage efficiency, effectiveness, and cost savings (Ward 2007). Public managers and politicians frequently mention efficiency and improved performance as some of the core benefits of privatization (Baig 2017; Jensen and Stonecash 2005), especially in response to budget crises or times of fiscal austerity.
Contracting out public services can also circumvent internal pay equity or hiring structures. For example, it is not unusual for governments to pay workers in some occupations above the market rate to promote perceived fairness. Contracting out workers in noncore functions, such as cleaning and security, allows agencies to avoid adhering to this norm (Grimshaw et al. 2015). Conversely, private sector salaries for some high-skilled jobs are higher than those on the government pay scale, so federal hiring managers may use contractors to recruit highly skilled workers at more competitive salaries. Some have criticized this practice as leading to “perma-temps,” precluding these workers from the benefits and rights that come with federal employment, while others argue that contracting can allow governments to hire for temporary projects as necessary and avoid possible onerous and lengthy state or federal hiring policies (General Accounting Office 2002).
Recent Trends in Prevalence
Although outsourcing in the federal government has been common for decades, the use of temporary contract workers has increased particularly sharply during the Trump administration, with federal spending on such staffing more than doubling. Temporary staffing firms are used across all areas of the U.S. government, but some agencies now rely on them particularly heavily. The increase in temporary staffing has been largest in health care, especially at the National Institutes of Health, the Indian Health Service, and the Veterans Administration (Padin and Schwartz 2019). In some cases, such as in matters of national security or through especially complex contracts, data on federal contractors are difficult to obtain, which has made estimating the true size of the overall U.S. government workforce a significant challenge (Government Accountability Office 2018; Light 2017).
Does Outsourcing Save Governments Money?
While the stated rationale for outsourcing in the public sector, as in the private sector, is typically to save money, it is unclear whether, and to what extent, public sector outsourcing reduces expenditures. Some studies, in fact, argue that it is more expensive to have private contractors perform government work. One study by public administrators who had worked in various parts of the federal government notes that contracting with private firms can raise costs through additional overhead, contract administration, and private sector profit margins (Oman et al. 2003). Others have suggested that public sector outsourcing may reduce efficiency through the loss of control by public managers (Baig 2017) or the deterioration of institutional knowledge because of greater turnover (Padin and Schwartz 2019), although little concrete evidence exists to support these concerns.
On the other hand, some have posited that public sector outsourcing may lead to a reduction in service quality, and evidence in this regard is somewhat clearer. For example, a case study of the outsourcing of library management finds that, across the seven sites examined, costs did not fall in several cases, while quality of services suffered (Ward 2007). Additionally, high turnover among contracted medical workers has had negative impacts on patient care, with a National Academies report finding that nurses working on site for shorter periods lacked familiarity with hospital procedures, equipment, and personnel, which led to increased error rates (Page 2004).
Furthermore, outsourcing can have spillover effects for remaining government employees. While outsourcing of routine tasks could free up time for employees to focus on higher value-added activities, outsourcing of core activities may reduce public sector employees’ chances for advancement and perceptions of job security, thereby lowering their morale and productivity. Indeed, studies find evidence that outsourcing, sometimes coupled with hiring and pay freezes, lowers morale among state and federal government workers in the United States (DeHart-Davis and Kingsley 2005; Oman et al. 2003), and a study of probation officers in the U.K. finds some evidence that it lowers productivity (Kirton and Guillaume 2017). Other studies suggest that employee engagement suffers after outsourcing (Kirton and Guillaume 2017) or has led to distributive conflicts as governments squeeze profits from competing contractors, which in turn has led to worse employment conditions for the affected workers (Grimshaw et al. 2015).
Government employment has long been seen as providing high-quality jobs, especially for women and racial and ethnic minorities (Lewis and Frank 2002), but this may be changing with the growth of outsourcing. While evidence is unclear whether outsourcing has reduced costs, there is some evidence that it has reduced employee productivity and service quality. As in other areas of domestic outsourcing, more research is needed to understand the extent and nature of this phenomenon in the public sector.
Andersson, Fredrik, and Henrik Jordahl. 2011. “Outsourcing Public Services: Ownership, Competition, Quality and Contracting.” IFN Working Paper No. 874. Stockholm: Research Institute of Industrial Economics.
Baig, Shakeel. 2017. “Experiences of Public Agency Managers When Making Outsourcing Decisions” Unpublished doctoral dissertation, Walden University.
Bureau of Labor Statistics. 2020. “Union Members Summary.” January 22. Washington, DC: Bureau of Labor Statistics.
Chesterman, Simon, and Angelina Fisher, eds. 2009. Private Security, Public Order: The Outsourcing of Public Services and its Limits. Oxford: Oxford University Press.
DeHart-Davis, Leisha, and Gordon Kingsley. 2005. “Managerial Perceptions of Privatization: Evidence from a State Department of Transportation.” State and Local Government Review 37(3): 228-241.
General Accounting Office. 2002. Federal Employees: OPM Data Do Not Identify if Temporary Employees Work for Extended Periods. Publication No. GAO-02-296. Washington, DC: General Accounting Office.
Government Accountability Office. 2018. Indian Health Service: Agency Faces Ongoing Challenges Filling Provider Vacancies. Publication No. GAO-18-580. Washington, DC: Government Accountability Office.
Grimshaw, Damian, Jill Rubery, Dominique Anxo, Maya Bacache-Beauvallet, László Neumann, and Claudia Weinkopf. 2015. “Outsourcing of Public Services in Europe and Segmentation Effects: The Influence of Labour Market Factors.” European Journal of Industrial Relations 21(4): 295-313.
Jensen, Paul H., and Robin E. Stonecash. 2005. “Incentives and the Efficiency of Public Sector‐Outsourcing Contracts.” Journal of Economic Surveys 19(5): 767-787.
Kirton, Gill, and Cécile Guillaume. 2017. “Work, Employment and Engagement Conditions in a Female‐Dominated Public Service Occupation after Restructuring/Outsourcing.” Industrial Relations Journal 48(5-6): 482-499.
Lewis, Gregory B., and Sue A. Frank. 2002. “Who Wants to Work for the Government?” Public Administration Review 62(4): 395-404.
Light, Paul C. 2017. The True Size of Government: Tracking Washington’s Blended Workforce, 1984–2015. New York: The Volcker Alliance.
Oman, Ray C., Ronald L. Gabriel, Jacqueline J. Garrett, and Kenneth B. Malmberg. 2003. “Actions by Political Officials Have Weakened the Federal Government Workplace.” International Journal of Public Administration 26(10-11): 1257-1286.
Padin, Laura, and Chris Schwartz. 2019. “Temping Out the Federal Government.” Policy & data brief, June 19. New York: National Employment Law Project.
Page, Ann, ed. 2004. Keeping Patients Safe: Transforming the Work Environment of Nurses. Washington, DC: National Academies Press.
Ward, Robert C. 2007. “The Outsourcing of Public Library Management: An Analysis of the Application of New Public Management Theories from the Principal-Agent Perspective.” Administration and Society 38(6): 627-648.
- i. According to the U.S. Bureau of Labor Statistics, as of 2019, 33.6 percent of U.S. public sector workers are union members, compared to 6.2 percent of private sector workers. https://www.bls.gov/news.release/union2.nr0.htm