US state government privatization: Implications for social equity and inequality?

• Published date: 01 January 2023
• Author: Sarah Ausmus Smith
• Date: 01 January 2023
• DOI: http://doi.org/10.1111/puar.13565

RESEARCH ARTICLE

US state government privatization: Implications for social

equity and inequality?

Sarah Ausmus Smith

Martin School of Public Policy and

Administration, University of Kentucky,

Lexington, Kentucky, USA

Correspondence

Sarah Ausmus Smith, Martin School of Public

Policy and Administration, University of

Kentucky, 4th floor Patterson Office Tower,

Lexington, KY 40506, USA.

Email: sarah.ausmus@gmail.com

Abstract

Privatization of state government services is commonplace, but our understanding

of its effects is limited by data availability. We study the relationship between

American state government contracting and public sector wages. Governments

have used public sector employment to support a variety of goals, including social

equity and economic development, but privatization, as a new public manage-

ment (NPM) reform, may shift the focus. Our empirical analysis shows that state

privatization of service delivery is associated with decreases in the public sector

wage premium, but that these effects are not driven by gender, race, or low-levels

of educational attainment. The fidelity of the implementation to NPM values con-

ditions these effects. We also find that contracting service delivery is associated

with a lower public sector wage premium for middle-class workers.

Evidence for Practice

•All else being equal, state government workers earn more than their private sec-

tor counterparts. However, contracting out does not just shift service delivery

away from state employees—it also may erode existing public wages.

•This relationship is larger in states where the implementation of contracting out

is perceived as more successful in achieving goals associated with New Public

Management (NPM) principles, such as accountability and public satisfaction.

•Although these effects are not magnified for traditionally marginalized groups in

the labor force, such as women and African Americans, contracting service deliv-

ery is associated with a lower public sector wage premium for middle-class

workers.

•Contracting service delivery as a tool of NPM governance may make the public

sector look more like the private one with respect to the erosion of the middle

class.

Government privatization in the United States today is

ubiquitous. Policymakers have turned to businesses and

nonprofits to provide everything from garbage collection

to space shuttles. Although scholars have debated the

conditions that increase the likelihood a government will

privatize and whether or not doing so achieves the out-

comes advocates promote, there has been a relative

dearth of research examining the effects these implemen-

tation choices have on state government employees. In

this article, we study the relationship between American

state government contracting and state government

wages, focusing on its implications for various forms of

inequality. State governments can provide opportunities

to those who are penalized in the private labor market for

their gender or race (Lewis, Pathak, & Galloway, 2018;

Llorens et al., 2008).

This article contributes to the literature in several

ways. We extend theory regarding the relationship

between new public management (NPM) administrative

reforms and social inequality outcomes, and we increase

our understanding of an understudied area of public

management—contracting out by state governments. As

institutions, state governments fill functional roles and

maintain levels of autonomy that make them distinct.

Although local governments are constrained in their

decision-making relating to public personnel by state-

level statutes (Bowman & Kearney, 2012; Relations, 1993),

state political and administrative actors exercise authority

Received: 21 December 2021 Revised: 19 September 2022 Accepted: 24 September 2022

DOI: 10.1111/puar.13565

Public Admin Rev. 2023;83:35–50. wileyonlinelibrary.com/journal/puar © 2022 American Society for Public Administration. 35

over personnel policy (Llorens, 2008). The federal govern-

ment has also devolved the design and implementation

of many workforce-intensive programs to state govern-

ments, notably welfare. Coupling this policymaking dis-

cretion with the fact that state governments are often the

largest government employers in their jurisdictions, we

can surmise that their management choices can have

far-reaching effects. Our findings highlight the need for

further study of the effects of state government privatiza-

tion on broader social outcomes. Our empirical work

shows that state privatization of service delivery

decreases the public sector wage premium, but that these

effects are not driven by gender, race, or low-levels of

educational attainment. The quality of implementation

conditions these effects. We also find that contracting ser-

vice delivery is associated with a lower public sector wage

premium for middle-class workers.

BACKGROUND: STATE AND LOCAL

PRIVATIZATION IN THE UNITED STATES

The term “privatization”refers to a host of strategies in

which governments engage to “promote greater involve-

ment on the part of the private sector in the administra-

tion or financing traditional governmental services”(436),

including vouchers, public-private partnerships, franchise

rights, grants, subsidies, asset sales, or even the reliance

on volunteerism and private donations (Auger, 1999).

Given our theoretical argument focuses on public

employment in the American context, our focus is on one

particular form of privatization—contracting. Under this

arrangement, a government entity agrees to pay an out-

side organization to provide a good or service, such as

trash collection. In the United States, contracting out has

been one of the most popular forms of privatization for

state governments (Chi et al., 2003). According to public

choice theory, contracting out public service delivery may

produce cost savings and limit the opportunity for rent-

seeking by politicians and bureaucrats, given the assump-

tion that the market is sufficiently competitive and thus

efficient (Bel & Fageda, 2007). These gains in efficiency

are also dependent on transaction costs associated with

setting and enforcing contracts (Petersen et al., 2019).

Alternatively, others have argued that the choice to con-

tract is not solely a function of economic efficiencies, but

also is the result of political calculus (Fernandez

et al., 2008; Price & Riccucci, 2005).

Scholars have considered the importance of both ser-

vice features, such as asset specificity, and government

and market characteristics, including the level of competi-

tion, fiscal constraints, and political conditions, to the

mode of delivery selected by local governments

(Alonso & Andrews, 2020; Bel & Fageda, 2009,2017;

Brown & Potoski, 2003; Fernandez et al., 2008; Hefetz &

Warner, 2012; Levin & Tadelis, 2010; Rho, 2013; Van

Slyke, 2003; Zhang et al., 2018). According to Brudney

et al. (2005), perceived competition, potential for cost sav-

ings, and political context were not significant predictors

of American state government contracting, but some ser-

vice types were more prone to contracting overall, includ-

ing social services, health, and transportation. Evidence

regarding the effects of local government contracting on

cost savings and service quality are mixed (Bel

et al., 2010; Boyne, 1998; Heinrich, 2000; Leland &

Smirnova, 2009;O’Toole Jr & Meier, 2004; Perry &

Babitsky, 1986; Rho, 2013); policy outcomes of privatizing

service delivery are also mixed at the state-level (Aizer

et al., 2007; Duggan, 2004; Duggan & Hayford, 2013;

Elgin & Carter, 2020).

BACKGROUND: PUBLIC SECTOR

EMPLOYMENT IN THE UNITED STATES

Comparisons of public and private sector employment in

the United States have considered wages, benefits,

inequality, and social equity. Estimates of private-public

wage differentials vary widely depending on how the

comparison is drawn—overall averages; controlling for

worker characteristics, such as experience and education;

and accounting for occupation (Borjas, 2002; Lewis,

Pathak, & Galloway, 2018; Llorens, 2008). Comparing over-

all average income over time reveals public sector

workers have consistently had higher incomes in the last

couple decades, with the greatest differential between

the federal and private sector workforce; state employees

have averaged incomes between four and nearly 20%

higher (see Appendix, Figure A1).

With respect to social equity, there is evidence that

women and racial minorities earn higher wages in public

sector employment (Lewis, Pathak, & Galloway, 2018;

Llorens, 2008); however, progress in closing pay gaps may

have stalled in state governments, even as they continue

to have more equitable pay than in the private market

(Lewis, Boyd, & Pathak, 2018). Benefits generally represent

a larger share of total employee compensation for state

and local government employees than private sector

ones (Lewis, Pathak, & Galloway, 2018). Some scholars

have noted the seeming insulation the public sector has

experienced from the increasing wage inequality

observed in the private sector (Borjas, 2002; Katz &

Krueger, 1991). Over a third of all public sector workers

are unionized—roughly 30% and 40% of employees of

state and local governments, respectively, are in unions,

compared to 6% of private sector employees

(Statistics, 2022). While private employee union member-

ship has declined continuously over the last 20 years,

state government worker union membership has

remained steady. Through public sector unions, workers

can utilize collective bargaining to increase wages and

benefits (Anzia & Moe, 2015).

In addition to contracting out, a variety of other NPM

reforms have impacted how state governments manage

36 US STATE PRIVATIZATION AND INEQUALITY