If you want to understand how privatization of public services typically works, Grand Rapids, Michigan is as good a place as any to start.
The state operates a nursing home for veterans in the town. Until 2011, it directly employed 170 nursing assistants, but also relied on 100 assistants in the same facility provided by a private contractor. The state paid its direct employees $15 to $20 an hour and provided them with health insurance and pensions. Meanwhile, the contractor started pay for its nursing assistants at $8.50 an hour — still billing the state $14.99 — and provided no benefits for employees. This led to high worker turnover, reduced quality of care, and heavy employee reliance on food stamps and other public aid.
Yet despite the evidence from this useful — albeit unplanned — experiment, which showed that any savings the state made through privatization came at the expense of workers and their clients, the new conservative Republican state government decided in 2011 to complete the privatization of the provision of nursing aides to the home.
The experience with privatization at the Grand Rapids nursing home is in many ways typical among the rapidly growing ranks of public agencies in which the staff of private contractors replace government employees. And according to a new report, “Race to the Bottom: How Outsourcing Public Services Rewards Corporations and Punishes the Middle Class,” privatization policies around the country have greatly contributed to the nation’s growing economic inequality and to a decline in the quality of public services.
The report, released on June 3 by In the Public Interest (ITPI), a resource center on privatization, concludes that in most cases, privatization policies lead directly to cutbacks in government investment in skill development and to reductions in workers’ pay and benefits. In turn, workers have less income to invest in their households, their children and their neighborhoods — leaving individuals and their communities poorly served in the present and ill prepared for the future.
Regardless of level of government, the story of privatization remains much the same. Elected leaders, often under legislative or political pressure from voters, try to reduce spending or taxes by relying on contractors for services instead. This way, politicians can attempt to avoid responsibility for the pay cuts and worker eliminations that almost inevitably result from privatization.
Government privatizers turn over huge swaths of public service work to private contractors — jobs such as corrections officers, nursing aides, teachers, school support personnel, clerks, waste haulers, food service workers and many others. Nobody knows precisely how much government work is now subcontracted, but New York University professor Paul Light estimates that there are about three times as many federal contract workers as civil service employees, with millions more at the state level.Privatizers frequently claim that they charge governments low rates because they are especially efficient. In many cases, however, public employees are at least as efficient as private contract ones. Instead, if contractors’ operational cost is lower, the savings stem from the comparatively low salary their employees receive. For example, the median private corrections worker in the United States earns $29,000 a year compared with $38,000 to $39,000 for, respectively, the median state or local officer working in comparable positions. Furthermore, a a Demos study last year estimated that about two million federal contract or other publicly funded workers earned less than $12 an hour, more than the number of low-wage workers at Walmart and McDonald’s combined.
Even if advocates of privatization admit that the savings through contracting result from lower pay, not greater efficiency, they typically argue that governments pay above-market wages. Contracting out saves money for taxpayers by eliminating that premium, they say.
But when governments properly account for all of their costs, sub-contractors are often more expensive than public employees. For example, the nonprofit watchdog Project on Government Oversight found that using contractors cost the federal government more than civil service employment in 33 of 35 occupations, resulting in billions of dollars total.
Those costs stem from a variety of sources. Governments must frequently hire an additional layer of supervisors to make sure contractors meet legal and other requirements. In addition, poorly paid contract employees often collect public assistance from supplemental nutrition programs, Medicaid and other aid for the needy, whose costs should be attributed to the contract.
Contracting out public work also rolls back critical progress toward equality on the basis of gender, race and income. Whatever their shortcomings, public employers in recent decades have opened up more opportunities and paid fairer wages to both African Americans and women than the private sector. For several decades, the ITPI report says, direct government employment of public service workers has provided a “ladder of opportunity” for many workers. Public jobs have opened up opportunity, especially where unions have bargained for contracts and influenced public policy. They have played an especially important role for women and African Americans, who still suffer disadvantages in the job market and are most hurt by cuts in public service pay and benefits.
For example, women comprise 57 percent of all government workers. And African Americans are 30 percent more likely than all other Americans to work in the public sector. Compared with black workers in the private sector, black public employees earn 25 percent more.
Cutting public service pay, therefore, compounds the inequities of income in America, replacing the ladder of opportunity upwards with a “downward spiral.” And though this downward shift may most negatively impact African Americans and women, “it hurts all workers,” says economics professor Daphne Greenwood of the Colorado Center for Policy Studies.
Economists argue over the degree to which broad forces such as technology development or globalization account for rising inequality in the United States, says Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities. But privatization, he says, is one major cause of increased inequality that “smart policy” could easily reverse.
As some first steps toward that smart policy, In the Public Interest recommends that governments require contractors to show that their cost savings come from innovation and efficiency, not wage and benefit cuts. Contractors should be required to provide a living wage, health insurance and other benefits, ITPI also suggests. Though the McNamara‑O’Hara Service Contract Act is designed to guarantee that federal contract workers in service work earn close to the prevailing wage in comparable jobs, both its coverage and enforcement are inadequate. Governments should collect and share detailed information on private contractors and their performance, ITPI says, in addition to preparing social and economic impact analyses in advance of any contract.
Mary Sparrow, a former custodian at the Milwaukee County Courthouse in Wisconsin, might have benefitted from such revisions. She was laid off in 2009 in the depth of the Great Recession after a private contractor, MidAmerican Building Services, won a contract to clean the building. The company told her she could keep the job — but not the pay. They offered her $8 an hour, instead of the $14.29 she had been making, and none of her former benefits. She and her husband have scraped by since, she said at a press conference at the release of the ITPI report, her voice cracking with emotion — buying health insurance with unemployment insurance payments, exhausting life savings for their children’s college to cover myriad expenses, contending with health worsened by stress, and watching former co-workers relying on food banks.
“Only the contractors come out ahead, not the middle class, the front-line workers,” Sparrow told the assembled crowd. “Milwaukee County or any county that privatizes will not see the promised cost savings. Privatizing has a devastating effect on our communities, not only on what we earn but what we spend, even on basics like housing and medication. This has been awful for us, and I hope any city, any state, will think twice before privatizing.”
David Moberg, a senior editor of In These Times, has been on the staff of the magazine since it began publishing in 1976. Before joining In These Times, he completed his work for a Ph.D. in anthropology at the University of Chicago and worked for Newsweek. He has received fellowships from the John D. and Catherine T. MacArthur Foundation and the Nation Institute for research on the new global economy.