2009 Feb EPI Outsourcing Poverty
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Outsourcing Poverty: Federal Contracting Pushes Down Wages and Benefits

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Federal agencies have been under pressure to reduce the size of their workforce and cut costs, creating the incentive to outsource government work through contracts with private businesses for goods and services. Between 2000 and 2006, federal contract spending increased 69.1%—from $256 billion to $415 billion. This upsurge in spending represents a growing share of the federal budget: by 2006, the cost of contracting out for goods and services constituted 16.1% of all federal outlays, up from 12.4% in 2000.

In terms of jobs, between 2000 and 2006, the number of federal contract workers increased from 1.4 million to 2.0 million. This compares to 2.7 million federal employees. In short, 43% of all employees who do the government’s work are actually employed by private businesses.

This Issue Brief examines the wage and benefit standards in government and contracted work. We find that contracted employees are much less likely to earn wages high enough to allow a single full-time worker to put a family of four over the poverty threshold ($9.91/hour in 2006). We estimate that in 2006, nearly 20% of contracted employees earned wages under this benchmark, while fewer than 8% of federal employees did.

Further, given that federal employees are more likely than those in the private sector to have access to employer-sponsored health insurance or retirement plans, contracting out work almost surely decreases benefit coverage and pays lower wages for many workers.

The outsourcing of government work through federal contracts is often done in the name of cost-saving. However, much of this saving does not come from greater efficiency in provision, but from the willingness and ability of private contractors to push down wages and benefits for employees.