Privatization widens economic inequality and punishes communities

A growing body of evidence suggests an alarming trend: outsourcing public services is accelerating the downward spiral in which reduced worker wages and benefits hurt the local economy and overall stability of working and middle class communities.  This growing income gap, driven by local and state government contracting, rising CEO contractor salaries and falling worker wages, is the subject of a new report from In The Public Interest (ITPI) titled “Race to the Bottom: How Outsourcing Public Services RewardsCorporations and Punishes the Middle Class.”

By paying family supporting wages and providing benefits like health insurance and sick leave, in the past government allowed public service workers to create better opportunities for their families. This is especially true for women and people of color, for which the public sector has been a source of stable middle-class careers.

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Yet, a disturbing new trend has reversed this dynamic. Low-road government contracts have become increasingly popular in recent years, as governments look to outsourcing as a way to balance budgets, despite the evidence that savings fail to materialize. What’s worse, while outsourcing slashes pay and benefits for working-class Americans, contractors can count on guaranteed profits and multi-million dollar compensation packages from lucrative government contracts.

This paradigm is not incidental.  Outsourcing initiatives at every level of government are accelerating and threatening millions of middle class households – 10 jobs, 100 jobs and even 1000 jobs at a time. For example:

  • In New Jersey, food service workers had their wages cut by $4-6/hour and many of their health insurance benefits wiped out when their jobs were outsourced to companies like Aramark, Sodexo and Compass.  Food service companies have among the highest levels of employees and their children enrolled in the New Jersey FamilyCare program – driving up poverty and likely costing taxpayers far more than any savings realized from privatization.
  • In Michigan, nursing assistant jobs at a veterans home went from a $15-20 hourly wage with health benefits to a starting wage of $8.50 per hour with no benefits after the jobs were outsourced.  Studies show the cuts resulted in higher turnover among the outsourced nursing assistants, and ultimately, lower levels of reliability and quality of care for veterans. 
  • In Milwaukee, the county outsourced nearly 90 custodial jobs to MidAmerican Building Services, a for-profit company that slashed compensation so much that many county workers with families could no longer afford to work there.  One custodian skipped doctor visits to save money and had to dip into her son’s college fund to pay for daily necessities.  Another custodian was forced to cut back on treatments needed by his disabled son due to the loss of income. 

The idea of working and middle class families losing out while far-away corporations who've never stepped foot in their neighborhoods rake in their tax dollars is bad enough. But research also shows that when these jobs are privatized, entire communities suffer.

When contractors cut wages, public service workers have less income to spend in their communities. That’s less shopping at local retail businesses, less eating out at local restaurants, and less economic activity across the entire community. Local and state governments collect less in sales taxes to reinvest in community schools and infrastructure. Workers are also less likely to earn enough to buy a home, and sometimes must move out of the community all together in search of affordable housing. These consequences mean that the effects of outsourcing on a community aren’t limited to wages and benefits, but are widespread and can be devastating.

The body of research is clear. Without proper protections in contracts that ensure workers receive fair pay and benefits, taxpayers are inadvertently pushing our neighbors into poverty and eroding our services to boot. In the Public Interest has proposed stepsthat state and local governments can take, to ensure responsible contracting and keep tax dollars invested in local communities – keeping local families strong.

First and foremost, local and state governments must guarantee that any company that wants to profit off local taxpayers must in turn make a commitment to the local community by paying their workers a living wage and reasonable benefits.  Otherwise, privatization just ends up rewarding the wealthy while the rest fall further behind.

Cohen is executive director of In The Public Interest, a project of the Partnership for Working Families.