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Race to the Bottom: How Outsourcing Public Services Rewards Corporations and Punishes the Middle Class

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As state and local governments outsource important public functions to for-profit and other private entities, what happens to the quality of life for the workers who provide these services, and the communities in which they live? A growing body of evidence and industry wage data suggest an alarming trend: outsourcing public services sets off a downward spiral in which reduced worker wages and benefits can hurt the local economy and overall stability of middle and working class communities.  By paying family-supporting wages and providing important benefits such as health insurance and sick leave, governments historically created intentional “ladders of opportunity” to allow workers and their families to reach the middle class. This is especially true for women and African Americans for whom the public sector has been a source of stable middle-class careers. Low-road government contracts reverse this dynamic. While corporations rake in increasing profits through taxpayer dollars and CEO compensation continues to soar, numerous examples in this report show that workers employed by state and local government contractors receive low wages and few benefits:

  • A 2009 study on the effects of outsourcing on food service workers in K-12 public schools in New Jersey found that companies such as Aramark, Sodexo, and Compass cut workers’ wages by $4-6 per hour following privatization. Many workers completely lost their health insurance benefits. In fact, food service contractors have the highest level of employees and their children enrolled in New Jersey FamilyCare, the state’s Medicaid program.
  • In the 2011 outsourcing of nursing assistant positions at a Michigan state-run home that serves veterans, the contractor significantly lowered wages and benefits. Nursing assistants working for the contractor were paid a starting wage of $8.50 per hour with no health and pension benefits. State nursing assistants who worked directly for the public home earned between $15-20 her hour with health and pension benefits. Unfortunately, the low compensation levels resulted in higher turnover among the contractor nursing assistants, and ultimately, lower levels of reliability and quality of care.
  • Industry wage data show that in 2008, the median annual wage for correctional officers employed by state governments was $38,850 and local government was $37,510. Correctional officers employed by private prison companies only earned a median yearly salary of $28,790. The same trend can be seen in the waste industry. Trash collection workers employed by municipalities can earn an annual wage of $51,214. In contrast, private sector trash collection workers earn on average between $28,000 and $32,000 annually.                                                 

The private sector often fails to uphold its promise to run public services “better, faster, and cheaper” than the government, sometimes with horrific results. But this report reveals a far more alarming trend: all too often, taxpayers are inadvertently contributing to growing income inequality and the erosion of the middle class by turning middle class jobs into poverty-level jobs. This report explores how this dangerous race to the bottom results in hidden costs to the government, siphons money away from local communities, and has lasting future impacts well into the next generation.

State and local governments employ about 14.5 million full-time and almost 5 million part-time employees. The decisions that these cities and states make regarding their contracting practices and the resulting contracted jobs can impact millions of jobs which in turn can significantly affect economic inequality. The report concludes by sharing policy recommendations for reversing this dangerous trend, including:

  • Requiring contractors to show that cost savings derive from increased efficiencies and innovation, not a decrease in compensation
  • Requiring contractors to pay a living wage and provide health and other important benefits
  • Requiring transparency measures, such as tracking how much state and local governments are spending on private contracts, how many workers are employed by those contracts, and worker wage rates
  • Requiring governments to conduct a social and economic impact analysis before outsourcing

By implementing these policies, state and local governments can rebuild those ladders to the middle class that have eroded over the years. Instead of engaging in a race to the bottom, cities and states can ensure that taxpayer dollars used to pay people to perform public work result in solid family-supporting jobs.