An Overlooked Cost of Contracting Out: Evidence From Employee Turnover Intention in U.S. Federal Agencies

• Published date: 01 September 2021
• Author: Sergio Fernandez,Gyeo Reh Lee,Shinwoo Lee
• Date: 01 September 2021
• DOI: 10.1177/0091026020944558
• Subject Matter: Articles

https://doi.org/10.1177/0091026020944558

Public Personnel Management

2021, Vol. 50(3) 381 –407

© The Author(s) 2020

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DOI: 10.1177/0091026020944558

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Article

An Overlooked Cost of

Contracting Out: Evidence

From Employee Turnover

Intention in U.S. Federal

Agencies

Gyeo Reh Lee1, Sergio Fernandez1,2,

and Shinwoo Lee3

Abstract

Contracting out has long been used in all levels of government in the United

States, with federal contract spending increasing 8% to 9% annually since 2015.

The literature on contracting out has examined the impact of this practice on the

work-related attitudes and motivation of public employees who have transitioned

to work for private contractors. However, we understand very little about the

effects of contracting out on the overwhelming number of public employees who

are not displaced. Given the importance of work-related attitudes and turnover

for organizations, this study explores the potential consequences of contracting

out for employee turnover intention over a period of several years. The results

of panel data analyses suggest that an increase in contracting activity in federal

agencies increases the employee turnover intention rate. Contracting out also

impacts employee turnover intention indirectly through its influence on job

satisfaction.

Keywords

contracting out, privatization, employee turnover intention, employee job satisfaction,

new public management

1Indiana University Bloomington, IN, USA

2University of Pretoria, South Africa

3Incheon National University, South Korea

Corresponding Author:

Shinwoo Lee, Department of Public Administration, Incheon National University, 119 Academy-ro,

Songdo 1-dong, Incheon 22012, South Korea.

Email: korlsw79@gmail.com

944558PPMXXX10.1177/0091026020944558Public Personnel ManagementLee et al.

research-article2020

382 Public Personnel Management 50(3)

Introduction

Contracting out, in which public organizations shift the provision of public goods and

services to other organizations, has long been used in all levels of government in the

United States. Whereas the history of contracting out in the U.S. federal bureaucracy

goes back to the American Revolutionary War in the late 1770s, more extensive use of

the practice began during the 1980s under the Reagan administration (Pegnato, 2011).

By the 1990s, the contracting trend accelerated further, with a growing number of

public functions and services outsourced (Kettl, 1993), a substantial share of federal

spending going to contractors (Milward, 1994), and more civilian employees working

for government contractors than on the federal payroll (Frederickson, 1997). Both the

Clinton and Bush administrations expanded the use of competitive sourcing, which

requires competition between federal agencies and private vendors, in regard to fed-

eral jobs considered to be commercial; about half of federal jobs were affected by

potential competition with the private sector (Gansler & Lucyshyn, 2004).

The literature on government contracting has focused extensively on how to struc-

ture and manage the contracting process to ensure competition, mitigate agency prob-

lems, and reduce transaction costs (T. L. Brown et al., 2006; Fernandez, 2009; Girth

et al., 2012; Sclar, 2000), as well as on the effects of contracting on cost and quality of

services (Alonso et al., 2017; Bel et al., 2010; Hodge, 2000; Petersen et al., 2018).

More recently, researchers have begun to pay more attention to the effects of contract-

ing out on work-related attitudes and motivation of public employees (Battaglio, 2009;

Lindholst et al., 2018). These studies suggest negative consequences for public

employees transitioning to private-sector employment. However, how government

contracting out impacts public employees not displaced as a result of the transition to

external service delivery is a topic that has remained largely unexplored (G. R. Lee &

Lee, 2020).

This study seeks to expand our understanding of contracting out by examining how

this practice impacts the job satisfaction and turnover intention of federal government

employees, those who continue to work in federal agencies that engage in contacting

activity. More specifically, we empirically investigate whether and how an increase in

an agency’s contracting out activity affects the turnover intention rate among remain-

ing employees in an agency. Various streams of theory and research offer insight into

how contracting out can affect public employees’ intention to voluntarily leave their

organizations. Greater reliance on contracting, which can negatively impact public-

sector employment and poses a threat to job security (Fernandez et al., 2007), can be

viewed as a violation of the psychological contract between public-sector employees

and their employers (Lindholst et al., 2018). As predicted by psychological contract

theory, reduced job security can precipitate voluntary departure by those who have

survived previous efforts to outsource work (Turnley & Feldman, 2000). Moreover,

contracting out may generate additional job demands on public employees, create

stress, misalign the values of public employees and those of the organizations they

work for, and deny public employees a sense of autonomy (Fernandez & Smith, 2006;

Government Business Council, 2015; Lindholst et al., 2018; Nelson et al., 1995). For