The Unequal Distribution of Consequences of Contracting Out: Female, Low-skilled, and Young Workers Pay the Highest Price

Abstract

While the public and private labor markets are marked by significant differences in the institutions of wage formation, very few studies have examined workers’ wages and employment in the public and private sectors when solving the same tasks. Focusing on government contracting out, we examine the change in work income, employment, and government income benefits when public workers are transferred from a public to a private employer due to contracting out. Drawing on theories on wage gaps between the public and private sectors and the property rights literature, we develop novel hypotheses about how individual characteristics of workers moderate the impact of contracting out on workers. Using high-quality individual-level Danish register data, we establish a worker treatment group who experienced contracting out and match them with a similar group of public workers who did not. Difference-in-difference estimation with Coarsened Exact Matching suggests that workers overall experience a significant decline in work income and employment, albeit with major intergroup differences across gender, skills, and age. Our sub-group findings show that female, low-skilled, and younger workers pay the highest price for government contracting out, both in terms of salaries and employment. We discuss how economic theories of public‒private gaps in wage setting can be combined with public administration theories of contract design and monitoring to develop improved — and possibly more equitable — conditions for workers when governments contract out.