Outsourcing comes with a wage penalty, at least in some occupations

“Outsourcing of labor services grew substantially during the 1980s and 1990s and was associated with lower wages, fewer benefits, and lower rates of unionization” write Arindrajit Dube and Ethan Kaplan in Does Outsourcing Reduce Wages in the LowWage Service Occupations? Evidence from Janitors and Guards  on digitalcommons.ilr.cornell.edu

The authors focus on two occupations for which they can identify outsourcing in those two decades using industry and occupation codes: janitors and guards. Across a wide array of specifications, they find that the outsourcing wage penalty ranged from 4% to 7% for janitors and from 8% to 24% for guards. Their findings on health benefits mirror those on wages. Evidence suggests that the outsourcing penalty was not due to compensating differentials for higher benefits or lower hours, skill differences, or the types of industries that outsourced. Rather, outsourcing seems to have reduced
labor market rents for workers, especially for those in the upper half of the occupational wage distribution. Industries with higher historical wage premia were more likely to outsource service work.

“Over the past few decades, we have seen a substantial rise in the share of janitors and security guards who are employed by service contractors. These outsourced workers receive lower pay, unionize at substantially lower rates, and are paid lower union wage premia” the authors conclude.

Our results point us away from theories that explain the outsourcing wage and benefits penalty as “pass through” or solely as a competitive wage differential due to differences in skill mixes used by contractors in comparison with other employers. Moreover, evidence suggests that benefits decrease with outsourcing, both in an absolute sense and in relation to wages. And yet, we do not find compensating wage differentials associated with this reduction in benefits.

Although service contractors on average use different compositions of full- and part-time workers, this difference itself is not a source of the wage differentials, since such differentials exist primarily for full time workers.

Source: Does Outsourcing Reduce Wages in the Low-Wage Service Occupations? Evidence from Janitors and Guards