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, 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.