Privatization and Layoffs

The Real Story

The perception exists across the United States that privatization of public services results in massive layoffs as private companies get rid of highly-compensated public employees and replace them with lower paid, non-union workers with fewer benefits to perform the same services. This has generated intense opposition to privatization from public employee unions at all levels of government. However, there is much evidence to show that privatization has resulted in few, if any, layoffs and that public employees can actually benefit in the long term from private-sector management. Several studies demonstrate that the fears of many have been overblown:

  • A 1985 General Accounting Office (GAO) study of job displacement as a result of Department of Defense downsizing revealed that, of the 9,650 employees affected by privatization, 94 percent were placed in other government jobs or retired voluntarily. Half of the remaining six percent were employed with the private contractor. Only three percent were laid off.
  • In 1989, the National Commission on Employment Policy (NCEP), a research division of the U.S. Department of Labor, studied the effects of privatization on employees from a variety of jurisdictions across the nation over a five-year period. The report, regarded as the most comprehensive examination of privatization’s impact on government employees, found that, of the more than 2,000 workers in 34 privatized city and county services, only seven percent were laid off. More than 50 percent of the affected workers were hired by private contractors, approximately one-fourth (24 percent) of the employees transferred to other government positions, and seven percent retired. In conclusion, the study found that “in the majority of cases, cities and counties have done a commendable job of protecting the jobs of public employees.”
  • A 1995 study of privatization in Illinois municipalities found that only three percent of the 516 responding cities reported layoffs due to contracting. Nearly two-thirds (64.9 percent) of the cities reported no displacement of affected employees, while 10.8 percent transferred workers to other government jobs, 5.4 percent reported that employees were hired by the private contractors, 5.1 percent said the affected employees retired, and 9.8 percent reported a combination of these results. In late 1999, a follow-up survey of 220 Illinois cities of more than 5,000 in population found roughly the same percentage (only 3.8 percent) of cities reporting that employees were laid off as a result of privatization.

In fact, strategies to lessen the impact of privatization on public employees are now the rule, not the exception, among governments that contract services. Recent long-term contracts that privatized water and wastewater services in Atlanta, Buffalo, Milwaukee, and Indianapolis included provisions that all existing public employees would be hired by the private firm at comparable wages and with comparable benefits. In these examples, employees were unionized and the private contractor bargained in good faith with the union.

Reductions in force (RIFs) are usually accomplished through attrition instead of layoffs. Private contractors and public officials are aware of the intense opposition privatization can create, and have developed effective strategies to soften, if not overcome, such objections. Reducing the workforce through attrition to an efficient level allows private contractors time to win over employees and establish a level of trust.

Multiple sources exist that can assist public officials with employee transition strategies. For example, a 1997 General Accounting Office (GAO) report recommended employee involvement in the privatization decision-making process, training to provide skills for either competing against the private sector or monitoring contractor performance, and the creation of a safety net for displaced employees. The strategies will vary depending on local political factors and the relationship between political leaders and employees. Most officials said that the strategies were designed to bolster support for privatization as well as to mitigate employee concerns.

A 1997 International City/County Management Association (ICMA) survey confirmed the movement among municipalities to more employee-friendly policies. The number that adopted measures to overcome employee opposition and smooth the transition to privatization increased during the previous five years. Among the policies that cities increasingly use are:

  • Involving line employees in the evaluation process to determine the feasibility of a privatization initiative;
  • Adopting formal programs and policies to lessen the impact of privatization on public employees – such as requiring private contractors hire the existing workforce, or reducing public employment only through attrition; and
  • Managed competition wherein public employees can bid for public contracts with private firms.

Philadelphia provides an excellent example of the kinds of measures that can be taken to minimize job displacement effects. As part of former mayor Ed Rendell’s Competitive Contracting Program (CCP), introduced in 1992, the city implemented several programs deigned to assist public workers in the transition required by privatization and public-private competitions. The city created new job classifications and established a Redeployment Office to match the skills of displaced employees to position openings in other departments. It also gave displaced employees preferential consideration for other city jobs, and required private contractors to give first right of refusal to affected city workers. In one case, the city invited displaced prison food service workers to participate in special training for newly created correctional officer trainee jobs.

Layoffs are a very real concern to public employees when the issue of privatization is raised. However, there is little evidence to suggest that privatization results in massive layoffs and hardship for public employees. As recent research demonstrates, the trends in government are, in fact, just the opposite. Few governments report widespread layoffs due to privatization. Most governments that enter into privatization agreements require that contractors hire the existing workforce and reduce the number of employees only through attrition or cause. Innovative officials from both the public and private sectors are showing that privatization can produce a win-win-win outcome for government, employees, and taxpayers.