The High Cost of Low-Wage Public Service Outsourcing

http://www.thefiscaltimes.com/Articles/2014/06/03/High-Cost-Low-Wage-Public-Service-Outsourcing

BY ROB GARVER,
The Fiscal Times
June 3, 2014

In the late 1990s, as part of a rush to save money by privatizing government services, many school districts in New Jersey turned over their school lunch programs to private contractors. For the school districts, the results were what they expected – costs dropped. But a study set for release this afternoon suggests that the overall cost to New Jersey may have been higher than the amount saved by individual school districts – a warning that could apply to states, municipalities, and the federal government alike.

The study, “Race to the Bottom: How Outsourcing Public Services Rewards Corporations and Punishes the Middle Class,” was produced by In the Public Interest, a watchdog group that monitors privatization of government contracts. Its central finding is that when the government outsources its services, “local communities suffer the consequences of lower quality services and middle class jobs being replaced with poverty-level wages” while “far-away corporate executives benefit from lucrative government contracts.”

The New Jersey school lunch experience illustrates ITPI’s concerns. The study relies on work done by Mary McCain of the Center for Women and Work at Rutgers University. Her research found that contractors began by slashing workers’ wages by $4-6 per hour, and keeping them low. One worker told McCain that when the contractor took over the kitchen in the school where she worked, the starting wage was $8 per hour. Ten years later, she said, the wage remained the same.

Those are wages taken out of the local economy, ITPI contends, to enrich large firms in the business of contracting to provide services for the government.

Further, the study found, “Following outsourcing, most of the workers completely lost or received very few health insurance benefits from private contractors, leaving them either uninsured or enrolled in state public health insurance programs. During this time period food service contractors had among the highest levels of employees and their children enrolled in New Jersey FamilyCare, the state’s Medicaid program.”

According to ITPI, in the New Jersey case, the benefits derived by one governmental agency from privatization (public schools) manifested themselves as costs for other government programs (use of social services.) It’s a pattern, they say, that recurs across the country in various areas, from school kitchens to garbage collection to management of jails and prisons.

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[Full study at:]

http://www.inthepublicinterest.org/sites/default/files/Race-to-the-bottom.pdf

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This spending amounts to a hidden cost to the government that is not factored into the cost analysis when deciding whether to outsource a particular public service. By slashing labor costs, a company may be able to show a city or state cost savings on paper. However, low wages often mean that the number of Americans on public assistance rolls increases and these supplemental income and healthcare costs, instead of being the contracting employer’s responsibility, are merely shifted onto other parts of the government budget. These hidden costs of low-wage work amount to an implicit public subsidy to for-profit corporations. For example, researchers found that school cafeteria workers working for contractors in California received an average of $1,743 annually in public assistance because of their low pay.24 This means that California taxpayers contributed $1,743 to each worker to help make ends meet because their contractor employers declined to provide adequate wages and benefits. These hidden costs are rarely, if ever, taken into consideration when policymakers make the decision to outsource public functions.

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When contractors lower local workers’ wages and benefits, companies siphon money away from local economies. Recent research by Daphne Greenwood, an economist at the University of Colorado, shows that when workers’ wages decline through government outsourcing, those workers have less money to spend in their communities. This means that workers spend less in local retail, restaurants, and other establishments. Lower wages also mean that local and state governments collect less in sales, income, property, and other types of taxes. In short, less money flows into the local economy and more money is routed to for-profit corporations, their CEOs, and their shareholders.

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