Chicago’s outsourcing habit has costly consequences

By:  Daphne T. Greenwood April 14, 2014

Chicagoans are all too familiar with the city’s parking meter privatization fiasco. The deal was rushed and reckless and sucked billions of tax dollars out of the local economy and into the coffers of a corporate consortium backed by Wall Street. Not to mention citizens’ loss of control over parking spaces and services for decades to come.

Were these unintended consequences from hasty judgment calls at a time of fiscal crisis? The sad truth is that outsourcing deals often fail to address broader community impacts. My new study, “The Decision to Contract Out: Understanding the Full Economic and Social Impacts,” outlines how this has happened repeatedly all across the country. Think of outsourcing as a high-stakes and far less amusing game of Hasbro’s Mouse Trap. Just as the lever swats the boot, which in turn kicks the bucket, a bad government contract can hurt the local economy, which in turn can send communities into a downward spiral.

Let’s start with local economics. According to the Bureau of Labor Statistics, a worker who is employed and lives in the same city can be counted on to spend roughly half of his or her salary locally. However, that plummets when the employee provides the same service but resides elsewhere. Since Chicago contracted out employee benefits administration to Morneau-Shepell, a Canadian corporation, taxpayers now underwrite checks to out-of-state call centers. This money could have gone to workers who spend their paychecks in Chicago.

WAGE CUTS, TOO

And when there are savings from outsourcing, they typically involve big cuts in worker wages and benefits. Since Chicago outsourced homeless outreach services, the newly privatized jobs pay more than 40 percent less. So workers spend fewer evenings eating at local restaurants and have fewer dollars to spend at other local businesses. At that low pay, some workers no longer may have been able to afford to live in the city, as Chicago employees are required. Workers who commute in spend at most 5 to 10 percent of their pay in the local economy. It all adds up.

But it’s more than just economic activity. Public-sector jobs have provided ladders of opportunity to the middle class for several generations. African-American workers and women of all races — those struggling most today for a foothold in the economy — have a smaller pay gap in the public sector than the private. They also experience fewer barriers to promotion. The shift to private contractors reverses this, with long-term effects on them and their children.
Chicago is considering the Privatization Transparency and Accountability Ordinance, a package of reforms that would require an economic impact analysis, demonstrated cost savings and City Council hearing and approval prior to contracting out city services. The ordinance would require private contractors to ensure that a portion of their employees are city residents and are provided fair wages and benefits. That would ensure that private competition is based on real innovation or efficiency, not just driving down wages and undermining the economic vitality of Chicago neighborhoods.

Some critics argue that the ordinance should be stripped of provisions requiring fair worker compensation and an economic impact analysis. But this defies common sense. Carefully weighing the direct and indirect costs of outsourcing before any contract is signed will help prevent taxpayers in Chicago from being trapped like mice in long-term outsourcing deals that negatively impact the community as a whole.

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Daphne T. Greenwood is professor of economics and director of the Colorado Center for Policy Studies at the University of Colorado at Colorado Springs.
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