Does Outsourcing Reduce Wages in Low-Wage Service Occupations?

ILRReview Volume 63 | Number 2 Article 6 1-4-2010 Does Outsourcing Reduce Wages in the Low- Wage Service Occupations? Evidence from Janitors and Guards Arindrajit Dube University of California, Berkeley, [email protected] Ethan Kaplan Columbia University, [email protected] Follow this and additional works at: http://digitalcommons.ilr.cornell.edu/ilrreview Does Outsourcing Reduce Wages in the Low-Wage Service Occupations? Evidence from Janitors and Guards Abstract Outsourcing of labor services grew substantially during the 1980s and 1990s and was associated with lower wages, fewer benefits, nda lower rates of unionization. The uthora s 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. Keywords Outsourcing, Subcontracting, Industry Wage Premium This article is available in ILRReview: http://digitalcommons.ilr.cornell.edu/ilrreview/vol63/iss2/6 DOES OUTSOURCING REDUCE WAGES IN THE LOW-WAGE SERVICE OCCUPATIONS? EVIDENCE FROM JANITORS AND GUARDS ARINDRAJIT DUBE and ETHAN KAPLAN* Outsourcing of labor services grew substantially during the 1980s and 1990s and was associated with lower wages, fewer benefits, and lower rates of unionization. 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. ver the past several decades, there has wage differential, including unobserved O been a marked increase of service con- heterogeneity in skills, compensating dif- tractors in low-wage service occupations. At ferentials in benefits, and the nature of the the same time, there has been a sharp increase underlying industry engaged in outsourcing. in wage inequality in the United States and, in We also provide inter-temporal evidence on particular, a decline in real wages at the low what types of industries were more likely to end of the labor market. One set of explana- outsource over this period. Finally, we pro- tions for this rising inequality is that changes vide evidence on how increased outsourcing in the contracting environment have led to altered the distribution of wages in these oc- a rise in so-called contingent work or non- cupations during this period. The evidence standard work relations, with an attendant we present in this paper allows us to draw impact on wages. As common as this reason- a much stronger conclusion regarding the ing is in popular discussion, only limited impact of outsourcing on labor market rents empirical research on whether contracting of low wage service occupations. out has reduced wages has been conducted. To remedy this, we assess a number of dif- Relation to Existing Research ferent explanations behind the outsourcing We consider the contracting out of janitors and security guards over the 1980s and 1990s, two low-wage service occupations with *Arindrajit Dube is Assistant Professor of Economics substantial numbers of outsourced workers. at the University of Massachusetts-Amherst and Ethan Additionally, the skill requirements for these Kaplan is Assistant Professor of Economics at the Insti- tute for International Economic Studies at Stockholm occupations are relatively homogeneous, University. and the status of these workers as being Industrial and Labor Relations Review, Vol. 63, No. 2 (January 2010). © by Cornell University. 0019-7939/00/6302 $01.00 287 288 INDUSTRIAL AND LABOR RELATIONS REVIEW outsourced or in-house is easily identifiable the literature on inter-industry wage differ- using industrial and occupational codes. entials. Krueger and Summers (1988) and To date, formal empirical work on out- Gibbons and Katz (1992) documented that sourcing has been limited. Using the Current significant industry wage premia exist within Population Survey (CPS), Abraham (1990) occupations, racial groups, educational demonstrated that wages as well as non-wage groups, and gender—even controlling for benefits tend to be lower for outsourced work environment, firm size, and some forms workers than for those employed in-house. of unobserved skills. We are attempting to However, she did not address whether these establish that there is an inter-industry wage gaps reflected rent differentials due to out- premium for service contractors, but one that sourcing or were simply a product of differ- is different in that the industry differences ences in the skill mix. In subsequent work, merely reflect variation in the legal labels Abraham (1996) used an establishment of the employer of record. For example, if survey (the 1986/87 Industry Wage Surveys two janitors are earning different wages at a conducted by the BLS) to argue that the use manufacturing versus a retail establishment, of business support services is correlated with this can be considered a classic case of inter- lower compensation, volatility of demand industry wage differential. However, a janitor output, and availability of specialized skill earning different wages when employed by a of contractors. In his study of outsourcing, manufacturer as opposed to a service contrac- Berlinski (2008) used the contingent work- tor who contracts with the same manufacturer ers supplement, which includes information is qualitatively a different issue, since she can on underlying industry for employment for in principle do the same job with a nominally outsourced workers, to show that outsourc- different employer. ing wage differentials are not explained The existence of inter-industry wage dif- by underlying industry characteristics. His ferentials also provides a competing explana- sample size was small (the sample contained tion of the outsourcing wage differential. If less than 60 outsourced workers), however, industries that outsource tend to have lower and his cross-sectional analysis did not reveal industry wage premia, lower wages (and whether or not the reduced wage associ- rents) for outsourced workers may simply ated with outsourcing reflected lower labor reflect the characteristics of the “underlying” market rents. industry outsourcing the work. We assess this In addition to the work mentioned above, possibility empirically by studying what types some related research exists on the tempo- of industries actually outsource service work. rary help industry. For instance, Segal and In addition to estimating the mean impact on Sullivan (1997) noted that workers in the wages from being outsourced, we provide evi- temporary help industry are outsourced dence on where in the distribution of wages because they could potentially be hired for for guards and janitors outsourcing is likely the short term by the firms using their ser- to have had its largest impact. We do this by vices. They documented, using the CPS, that, reweighting the 1983 wage distribution with conditional on covariates, workers employed year 2000 probabilities of being outsourced in the temporary help industry earn lower conditional on observable data, using a semi- wages, receive fewer benefits, and unionize parametric estimator devised by DiNardo, at lower rates. This mirrors our findings for Fortin, and Lemieux (1996). permanent outsourcing. Autor (2003), for We also investigate whether outsourcing example, showed that the temporary help allows firms to lower inter-industry wage service industry increased most after states premiums. In other words, firms unable to made firing workers more difficult in states reduce rents that go to direct employees may with high union density, consistent with the be able to shift rents by contracting out these existence of rent differentials between out- services. Borjas and Ramey (2001) found that sourced and directly employed temporary over the past few decades, industries with high workers. wage premia have experienced reduced em- Methodologically, our study draws from ployment growth that is not accounted for by OUTSOURCING AND WAGES IN LOW-WAGE SERVICE OCCUPATIONS 289 differential productivity growth. Similarly, we quence, the union wage gap for outsourced found that industries with high wage premia workers may be smaller. Additionally, as a were more likely to outsource work, suggest- result of the threat effect of unionization, ing that some of the employment reduction outsourcing firms may also reduce

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