Outsourcing of public services in Europe and segmentation effects: The influence of labour market factors

Abstract

This article examines the influence of labour market factors on public authorities’ decisions to outsource public services in five countries. The dominant focus in the outsourcing literature is on a narrow range of factors: public–private gaps in pay, union membership and collective bargaining coverage. We find such differences to be variable, and develop a more encompassing perspective. This includes consideration of labour market rules that establish wage floors and employment protection (especially for outsourced workers) and the possible differentiation of legal status between public and private employees. Our case studies from local government in five countries highlight a set of country-specific interconnections between labour market factors and outsourcing. These lead to variations in both managers’ and unions’ approaches towards outsourcing and in outcomes for pay and working conditions. We call for a strengthening of the inclusiveness of industrial relations structures to combat problems of workforce fragmentation caused by outsourcing.

Keywords

France Germany Hungary labour market local government municipalities outsourcing procurement public services Sweden UK

Introduction

Severe public spending cuts during the current crisis in Europe have focused attention on the outsourcing of public services. While the overall benefits are contested (Bel et al., 2010; Flecker and Hermann, 2011), public organizations are increasingly encouraged or required to commission external organizations to deliver public services and to follow specific rules to encourage competition (Polacek et al., 2011). By exploiting gaps in pay and trade union influence between public and private sectors, outsourcing can enable management to cut wages and long-term labour costs (pensions, healthcare insurance, pay progression) (Berlinski, 2008; Dube and Kaplan, 2010).

Recent studies point to the role of public sector outsourcing in either reinforcing or undermining the institutional organization of labour markets, that is, in ‘market embedding’ or in ‘market making’ (Greer et al., 2011; Jaehrling, 2014). To investigate these roles further, we make two contributions. First, we consider how gaps between conditions in public and private sectors shape the incentives for management to outsource and for unions to resist (or not). Austerity increases the financial pressures but may also narrow or even reverse pay gaps, thereby changing the cost incentives for outsourcing and insourcing. Second, we argue for a more encompassing approach, to include general labour market rules that establish wage floors and employment protections for outsourced workers, the much neglected legal distinctions between public and private employee status and how these may influence the ownership structures of contractor organizations.

We begin with a review of the literature on outsourcing, focusing on the influences of three sets of labour market factors in explaining the form and pace of outsourcing of public services and the resulting patterns of labour market segmentation. This is followed by a description of methods and the presentation and analysis of empirical evidence derived from our case studies in local government in five countries: France, Germany, Hungary, Sweden and the United Kingdom.

Analysing the interconnections between outsourcing and the labour market

Figure 1 presents our comparative institutional framework. It identifies three sets of labour market factors – public–private gaps in pay and industrial relations, general employment rules and legal distinctions between public and private sector employees – which shape outsourcing decisions.

Figure 1.

Labour market factors and the decision to outsource public services.

Public–private gaps in pay and industrial relations

In both economics and industrial relations research, the main drivers of public sector outsourcing are presumed wage premia and stronger unionization in the public sector. Economics research normally regards outsourcing as efficient. Public sector employment contracts tend to be applied consistently across the entire workforce; but while higher ‘efficiency wages’ may be justified for core workers, they are deemed unnecessary for workers with low or readily available skills or who deliver services peripheral to the organization’s strategic goals (Diaz-Mora and Triguero-Cano, 2012). Outsourcing is said to enable a public employer to reduce labour costs for a target workforce group while avoiding internal pay equity issues (Abraham and Taylor, 1996). Berlinski’s (2008) analysis of factors affecting the contracting out of cleaning and security services (p. 73) is illustrative: ‘if norms of internal equity are binding for some firms so that they must pay above market wages for some occupations, then outside contractors may provide a valid mechanism to circumvent norms of internal equity for those firms’.

The industrial relations perspective is different: instead of associating public sector pay premia with privileged conditions, it problematizes the basis for comparison. Private sector pay rates for similarly qualified workers are unlikely to be the outcome of perfectly competitive labour markets. Moreover, where unions have negotiated public sector wages these are more likely to reflect fair rates for the job, in contrast to potentially exploitative and discriminatory conditions in the private sector. For example, research on the UK elderly care sector finds lower pay in the private sector to be the consequence of low-cost commissioning by local authorities, which exerts strong downwards pressure (Cunningham and James, 2009). Higher public sector pay for care workers reflects both the specialist care services provided in the remaining public sector units and some trade union success in shoring up fair pay for care workers through ‘equal pay proofing’ of job-related pay structures (Bessa et al., 2013; Perkins and White, 2010).

Second, industrial relations research provides a more differentiated analysis of public and private sector industrial relations. Across Europe, union density and collective bargaining coverage tends to be higher in the public sector than the private sector (see Table 1). However, the pattern is not uniform, resulting in varied conditions for public–private competition. For example, in the United Kingdom, collective wage bargaining and trade union representation are strong in the public sector but weak in the private sector. Both Sweden and Germany also have strongly organized public sectors, though German civil servants with Beamte status are not directly covered by collective bargaining. But while Sweden also enjoys relatively strong collective organization in the private sector, in Germany it is patchy; many employers providing outsourced public services are not signatories to the relevant sector agreement (Bispinck et al., 2010). By contrast, France has no formal collective bargaining in the public sector, only forms of consultation. Hungary does allow collective bargaining together with some high-level consultations for public service employees (mostly in education, health and social care), but the practical impact on salaries is limited.

Table 1.

Public–private industrial relations differences in five countries.

	Union density (UD, %)		Collective bargaining (CB %) coverage
	Public	Private	Public	Private
France	15	5	100	90
Germany	32	14	97	58
Hungary	26	5	29	33
Sweden	84	65	100	87
UK	56	14	68	17

Sources: Institutional Characteristics of Trade Unions, Wage Setting, State Intervention and Social Pacts (ICTWSS) database (http://www.uva-aias.net/208) except UD for Hungary (calculated from Hungarian Central Statistical Office data).

France: 2003 UD, 2008 CB; Germany: 2010; Hungary: 2009; Sweden: 2009 UD, 2007 CB; UK: 2011.

Mapping these institutional differences against evidence of public–private pay gaps, we find no universal pattern. Only the United Kingdom (and to some extent Germany) fits the stylized portrait of a public sector pay premium and strongly unionized workforce, although recent austerity policies in the United Kingdom have narrowed the public–private pay gap and restricted union actions over pay, and in Germany, there is some evidence of a wage penalty among male public sector workers (Bach and Stroleny, 2013; Brindusa et al., 2011). By contrast, in Sweden and Hungary there is a relatively narrow gap between public and private industrial relations conditions and this combines with evidence of pay penalties for public sector workers (Hámori and Köllő, 2013; Tepe et al., 2015).

Public–private differences in industrial relations conditions, although inter-related with pay gaps, may have independent influences on outsourcing practice. For example, public sector managers may outsource activities to evade joint regulation over pay and conditions, expecting that if private sector employers are able to act unilaterally they will ratchet down labour costs (see Shire et al., 2009 for evidence on temporary agency workers).

Employment protection and minimum wage rules

Employment conditions under outsourcing can be expected to be more subject to market- or client-mediated pressures, weakening the scope for protection through traditional internal labour market rules (Rubery et al., 2005; Weil, 2009). In this context, empirical analysis needs to focus more on the influence of general labour market rules and protections. Studies of inter-organizational contracting suggest that the stronger these general protections, the less likely that outsourcing will generate uneven segmentation between public and private sector employment (Cunningham and James, 2009; Wright and Brown, 2013). Moreover, because outsourcing inevitably generates distributive conflicts (between the public sector organization, the affected workforce and competing contractor organizations), standardization of employment conditions can reduce fears of distributive injustice.

Two further insights are relevant for our analysis. First, labour market rules that protect against the erosion of employment conditions through contracting out can reduce industrial relations conflict. Collective agreements may be formulated to extend harmonized conditions to contractors. For example, in the UK construction and engineering sector, the collective agreement is extended to all tiers of contractors and is said to have brought industrial relations stability (Wright and Brown, 2013). Similar evidence holds for both the ‘prevailing wage laws’ applied to publicly funded construction projects in the United States (Weil, 2009) and the short-lived ‘two-tier code’ in the United Kingdom that extended public health sector conditions to many contractors. An alternative mode of protection may be granted through legislation. Across European Union (EU) member states, rules derived from the 1977 Transfer of Undertakings Directive (TUPE) protect the terms and conditions of workers transferring with the outsourced service activity. Moreover, TUPE may facilitate outsourcing (and subsequent re-contracting) by enabling the smooth transfer of experienced employees to contractors and by defusing antagonistic feelings towards privatization of public services (Grimshaw and Miozzo, 2006). However, EU member states have interpreted the directive and associated European Court of Justice (ECJ) rulings in different ways (Hartzén et al., 2008), leading to significant differences in worker rights.

Second, imposing a wage floor at a suitable level can inject greater certainty into projected labour costs and encourage managers to shift away from cost-led outsourcing. Contractors bidding for low-wage service work tend to use labour costs as a key competitive advantage (Perraudin et al., 2014). In countries where low-wage work is more common in the private sector, a higher statutory national minimum wage can transform the cost incentives for outsourcing. Where a rising minimum wage catches up or overtakes minimum base rates in negotiated public sector pay scales, it neutralizes an important component in the outsourcing cost equation (Johnson, 2013).

Employers and unions may also negotiate wage floors above the statutory minimum (where present), either through an extended sector agreement or linked to the services contract. Effective mobilizations of union members have led to US living wage ordinances that require contractors to pay significantly above the statutory minimum and improve on other conditions, such as health insurance and paid annual leave (Pollin et al., 2008). In the EU, most regional governments in Germany since 2010 have incorporated social clauses into public procurement of services, despite the 2008 Rüffert judgement against the Niedersachsen (regional) government. A negative policy evaluation had led to 2006 legislation nullifying the clauses, and after Rüffert, more pay clauses were revised or abolished; but they were readopted after 2010. Where the activity is covered by a binding sectoral collective agreement (as in construction and cleaning services), the contractor must match the sectoral minimum. Where this is not the case, the social clause specifies a minimum rate corresponding to the lowest level of public sector pay in the region (Schulten, 2012).

Legal employment status and organizational forms

Where wage costs are broadly equivalent or even lower in the public than the private sector, the motivation for outsourcing must be found either in non-labour factors or in other employment concerns. Legal differences in public and private employment status are a feature of employment segmentation, often overlooked in outsourcing research. In countries where these divides exist, public employers may seek to exploit these divisions or to create new ones, even where wage gaps are not significant.

Germany and France have distinctive public and private employment statuses, although since the 1990s these have been partially eroded (Bach and Bordogna, 2011). In Germany, approximately one in three public sector workers are Beamte, with a special employment status subject to administrative law. While permitted to join unions, they are unable to bargain collectively or strike. Similar statutory regulations are used to manage fonctionnaires in France. However, French civil servants do enjoy the right to strike, subject to specified conditions (Mossé and Tchobanian, 1999).

A special legal status complicates the outsourcing decision. Transfers of Beamte to private contractors in the 1990s raised legal questions about how to protect their special status rights while facilitating new private sector mechanisms to set pay and conditions (Keller, 1999: 64). When French public enterprises such as telecommunications were privatized, fonctionnaires retained their public employment contracts under a 1990 law that modified their status. Under austerity conditions and the emergence of more authoritarian states in several European countries, the special legal status of civil servants could even become disadvantageous. Unions may perceive greater possibilities to improve employment conditions in outsourced private services.

A key issue for our analysis is how the distinctive legal employment statuses among civil servants, other public servants and private sector workers shape the choice of organizational form for the contractor organization. Procurement of public services is not a simple decision between complete outsourcing and retaining services in-house. Public sector managers may instead choose to establish a publicly owned enterprise because it circumvents perceived constraints imposed by the legal status of civil servants compared to workers covered by private law. Other factors may also be significant, such as the need for managers to retain operational control, or to capture an additional revenue stream.

Overall, the evidence reviewed informs three propositions concerning the influence of labour market factors on decisions to outsource public services:

The larger the public–private gaps in pay and collective representation, the stronger the incentives to outsource but also the greater the likelihood of trade union opposition;

The more that general labour market rules provide high universal protections, the less the employment segmentation caused by outsourcing;

The greater the differences in legal status attached to public and private sector employees, the wider the scope for using hybrid organizational forms in contracting.

Our research was designed to explore these three propositions in the local government sector in five diverse countries. Other factors will also shape outsourcing decisions, including government legislation and ideology, budget restrictions, corruption and opportunities for investment/profits, but our focus is on the role of labour market factors.

Research design and local government contexts

Teams in five countries, supported by EU funding, conducted research in municipalities to investigate changing employment relations and outsourcing practices in one public services area. The five countries provided a good mix of regulatory and operational contexts for investigating local government. In line with ‘best practice’ cross-national comparative research (Hantrais and Mangen, 1996), similar research instruments were deployed to capture similar issues in varying socio-economic contexts. Each team collected and analysed their country-level data, but at five points during a 12-month period the teams met to discuss and compare country findings and explanations, as well as to develop new iterations of questions arising from other teams’ experiences. Each team used a qualitative methodology consisting of interviews with key actors and collection of relevant documentation. Data collection involved two stages: first, collection of national and regional data to explore the context of pay and employment policies and procurement in local government (focusing on selected services: cleaning, school catering, elderly care, waste and public transport), and second, investigation of organizational practices and responses through multiple case studies, summarized in Table 2.

Table 2.

Summary information for 15 case studies in five countries.

	Cases	Population	Municipality workforce^a
France	Municipality A	100,000	3126
	Municipality B	60,000	1535
Germany	Municipality A	<500,000	6000
	Municipality B	>500,000	9000
	Municipality C	50,000	400
Hungary	Small town A	11,000	700
	Large town B	150,000	3000
Sweden	Växjö	83,710	5825^b
	Göteborg	520,374	31,145^b
UK	North West LA1	498,800	8907
	North West LA2	308,800	1859
	North West LA3	327,300	12,281
	East LA1	125,700	1010
	South East LA1	1,427,400	12,652
	South East LA2	239,700	3888

Data are approximate and not comparable: limited to local government administration in Germany while others include municipality-owned companies and/or schools.

Permanent staff only.

The rationale for case selection varied by country. In France and Sweden, the municipalities provided contrasting population demographics, budget constraints and approaches to outsourcing. In Germany, the cases facilitated a focus on the consequences of municipality indebtedness; they were located in Nordrhein-Westfalen, the most indebted region at the time. In Hungary, the selection of the Dunántúl (Transdanubia) region emphasized size and political differences, with one municipality implementing a new style of political reforms. In the United Kingdom, cases varied by size, living standards and industrial relations, including one municipality which had opted out of the sectoral collective agreement. Altogether, the 15 case studies provide important insights into the outsourcing process. They are not ‘matched cases’, since municipalities in each country are subject to distinctive governance and finance conditions and there are differences in which services are outsourced. Instead case-study evidence is used as a lens through which to interrogate the issues raised by our comparative institutional framework outlined above.

There are commonalities and differences in local government across Europe. Common to all five countries is the provision of care, welfare and education. A key source of differentiation concerns local government finance (see Table 3). Low dependency on central government may indicate autonomy, but there are contradictory factors. Governments in both France and Germany grant municipalities autonomy over outsourcing decisions but also impose statutory duties to deliver particular services, thereby creating budget pressures and incentives to outsource. Also, pressures to reduce indebtedness (Germany, Hungary) may induce creation of municipal companies to sell assets to reduce debt.

Table 3.

Characteristics of local government finance.

	Central government revenue (%)^a	Debt levels	Impact of austerity	Key challenges
France	Low (28)	Low	Limited	Rising social and welfare needs; decentralization of services
Germany	Low (16^b, 35^c)	High	Significant	Rising social benefit claims and deteriorating public infrastructure
Hungary	High (52)	High	Significant	Major differences in debt levels; non-tax strategies to plug income gaps
Sweden	Low (23)	Low	None	Reduced local tax revenues during recession causing temporary job cuts
UK	High (71)	Low	Significant	Large cuts in social services, frozen local property tax (2011–2013)

2012 Organisation for Economic Co-operation and Development (OECD) data, http://www.oecd.org/tax/federalism/oecdfiscaldecentralisationdatabase.htm#C_4

Länder.

Municipalities.

Central and local politics have important influences on management decisions to outsource. In the United Kingdom, since 2010 bids by municipalities for additional central government resources must normally include a private sector organization. Moreover, central government targeting of municipalities for disproportionate spending cuts has increased pressures to outsource services. Some German municipalities have independently adopted a ‘private before public’ ideology in their services delivery approach. They also face disincentives to sharing service provision as it would incur value-added tax (VAT). In post-transition Hungary, privatizations were motivated by needs for capital injections and foreign expertise and desires to demonstrate commitment to the market. The 2010 right-wing election victory unexpectedly turned the tide; the government re-nationalized several privatized companies and from 2012 facilitated outsourcing to the church by granting more generous support, while some municipalities began to insource services (Neumann et al. 2014). Thus, the factors shaping management motives to outsource (or insource) are both varied and changing.

By contrast, in France and Sweden central government provides no specific incentives to encourage outsourcing. Nor are municipalities apparently motivated by investment needs or debt reduction strategies, as budgetary problems are fewer. In France, the formation of regional groups of municipalities may provide an alternative to outsourcing by facilitating economies of scale. Moreover, a legal commitment to retain public control over public services has strongly influenced local strategies of insourcing. In Sweden, municipalities benefited from increased grants to limit the anticipated negative recessionary impact on revenues and employment, although there were temporary job cuts.

A final contextual difference relates to the financial and legal integrity of state institutions. Problems were most evident in Hungary, where concerns about the solvency of municipalities generated fears of corruption and of staff being unpaid.

Findings

Pay and industrial relations gaps

Our first proposition is that higher public–private gaps in pay and collective representation increase both management incentives to outsource and union resistance. The five country cases provide contrasting examples, as Table 4 indicates. France, Hungary and Sweden recorded neither positive public/private pay gaps nor union resistance to outsourcing, while the opposite applied in Germany and the United Kingdom.

Table 4.

The influence of pay and industrial relations gaps on outsourcing.

	Lower pay in private contractors?	Union resistance to outsourcing?
France	No (but possibly longer hours and higher workload)	No (some resistance to insourcing due to lost private sector benefits)
Germany	Yes (but pay gaps have narrowed)	Yes (no guarantee outsourced workers are covered by a collective agreement)
Hungary	No (very low pay in all service providers)	No (indebted municipalities, eroded wages and limited union influence)
Sweden	No (high collective bargaining coverage and narrow pay gaps)	No (no threat to employment conditions and representation)
UK	Yes (especially where municipalities enhance pay locally)	Yes (likelihood of significant erosion of employment conditions and pensions)

The reasons for limited union resistance varied. In Sweden, comprehensive coverage and generally harmonized pay levels among public and private sector collective agreements reduced the significance of pay issues. In France, municipality insourcing initiatives failed to gain active union support because of more favourable conditions among private contractors. In one case, in-house waste services staff were paid on a lower, more compressed seniority-related scale than those in private sector companies (albeit with trade-offs with working hours and work effort). In another French case, the outsourced public–private school caterer offered better pay prospects; insourced workers stood to lose private sector fringe benefits negotiated by the works committee and at least half their accumulated seniority entitlements.

In Hungary, the financial precariousness of many municipalities underpinned workers’ willingness to be outsourced. In one case, elder care workers accepted transfer to a church organization, following grave financial problems within the municipality and a management decision to abolish supplementary wage benefits. These workers nevertheless had to give up the protection of public sector wage agreements and relied only on the thin protection of the Labour Code. In another example, bus drivers employed under private law in a municipality-owned company were protected by a company agreement. The only benefits were a very small seniority supplement (less than 1% of hourly pay per year of service), an annual bonus based on tickets sold and overtime pay, but the union considered these significant since most workers earned only the statutory minimum wage.

In Sweden, pay and industrial relations gaps were limited and did not motivate management decisions to outsource. Indeed, all five service areas had public and private sector agreements with high coverage and similar negotiated minimum annual wage rises. For example, the 2012 public sector agreement for elder care specified a minimum monthly increase of SEK607 (€64) and the private sector agreement SEK655 (€69). Moreover, the school catering and cleaning sector agreements encompassed both public and private sectors.

In contrast, pay and industrial relations gaps did provide incentives to outsource in Germany and the United Kingdom. In Germany, two factors had narrowed the gap: the introduction of a low pay grade in the two public sector collective agreements, justified by employers as necessary to reduce incentives to outsource, and new binding sectoral minima, which raised pay in some outsourced local government services (elder care, commercial cleaning and waste services).

In the United Kingdom, very low collective bargaining coverage in the private sector meant social care, cleaning and school catering workers were paid at, or only slightly above, the statutory national minimum wage. As in Germany, the public–private gap for low-wage workers had narrowed following a 3-year freeze in the local government collective agreement. Nevertheless, five of six municipalities studied improved basic pay for the lowest paid through supplementary local wage agreements (including living wages). These adjustments reflected varying combinations of political, managerial and union goals: for example, to address poverty, staff retention and/or morale. However, in some municipalities, these basic pay rises were partially funded by reducing unsocial hours premia. Overall, public–private gaps remained significant, particularly given weak union presence among private contractors.

Employment protection and minimum wage rules

Our second proposition is that specific labour market rules that establish employment and wage protections for outsourced workers (TUPE, statutory minimum wages and social clauses) limit segmentation effects. While TUPE is in principle a common European rule, our research suggests country differences in interpretation (see Table 5). While all case studies confirmed rules that protect employees against dismissal at the point of transfer, only two countries gave all municipality workers the right to refuse transfer (Hungary, in public to private transfers only, and Sweden) while two provided rights to a sub-set of workers (non-Beamte in Germany and fonctionnaires in France). In one Swedish case, cleaners opted not to transfer and the municipality was legally obliged to seek redeployment opportunities before pursuing redundancies. In Germany, employees were entitled to lodge a written objection up to 1 month after the transfer notice, but if the municipality could not provide suitable redeployment, dismissal was possible. In the United Kingdom, although workers have the right to refuse transfer, case law interpretation has ‘made sure to empty it of any legal consequence’ (Hartzén et al., 2008: 9): those who object are treated as having resigned, forgoing redundancy compensation, unless the transfer can be shown to mean significantly worse conditions. Our data suggest that UK municipalities were seeking to evade TUPE regulation by using legal strategies known as ‘fragmentation’ (Adams, 2012), which reduce the possibility of associating a defined group of incumbent staff with the outsourced service. At one municipality, procurement of adult social care involved a deliberate geographical fragmentation of the activity, and at another, social care was outsourced incrementally through a series of small contracts.

Table 5.

Application of Transfer of Undertakings (Protection of Employment) in municipality procurement.

	Protection against dismissal on transfer?	Right to refuse transfer?	Collectively agreed conditions maintained on transfer?	Legal or informal minimum period of TUPE protection?
France	Yes	No (except civil servants)	Yes	Yes − 15 months
Germany	Yes	Yes	Yes	Yes − 12 months
Hungary	Yes	No (except public to private transfers)	Yes	Yes − 12 months
Sweden	Yes	Yes	Yes	Yes − 12 months
UK	Yes	Yes (but then treated as resignation)	Yes	No (but 2014 reform sets 12-month limit)

Source: Case-study data and Hartzén et al. (2008).

In four countries, managers and unions stated that protection of transferred employment conditions lasted for a specific maximum time: 12 months in Germany (except where the new employer is bound to a collective agreement with less favourable conditions), Hungary and Sweden, and 15 months in France. No time limit was mentioned in the United Kingdom (although after our fieldwork, new legal rules set the time at 12 months). In practice, TUPE-protected conditions may be sustained longer. In one French case, they were maintained for school catering employees despite recurrent contracting (municipality to a joint venture public enterprise and then to a private company). In another French case, the union fought to defend TUPE protections for non-fonctionnaires when a transport services contract was won by a company with a reputation for not honouring protected terms and conditions. The threatened workforce mounted a successful strike and won protection for the entire 6-year contract period, far more than the stipulated 15 months.

Wage floors associated with statutory minimum wages (France, Hungary, UK), sector minima (Germany, Sweden) and social clauses in contracts (Germany) had major influences on outsourcing, as Table 6 indicates. The effect of a statutory minimum wage is contingent on the shares of municipality and outsourced workers paid at or just above it. In France, it seems that the high minimum wage levelled wage competition among contractor bids. In Hungary, the dual statutory minimum wage structure for skilled and unskilled workers provided a benchmark for wage-setting in low-income localities. At one municipality, interviewees stated that ‘everyone is on the minimum wage’ whether employed by the municipality, a municipality-owned company or a for-profit or not-for-profit contractor. Wage costs nevertheless varied according to differences in the defined skill requirements of jobs, since skilled jobs were entitled to a differential of 16 percent in 2012.

Table 6.

The influence of statutory minimum wages (MWs) on outsourcing.

	% of median wage	Influence?	Social clause?
France	62^a	MW outpaced public sector wage grid, compressed pay differentials	No
Germany	47–105^b	New binding sector MWs reduce cost incentives to outsource	Yes
Hungary	54^a, 63^b	Two MWs provide benchmark pay rates for all organizations	No
Sweden	No MW	N/A	No (but municipality gender equality rules apply)
UK	47^a	Overtook sectoral collective agreement in 2013, reducing cost incentives to outsource	Some (e.g. living wage policies)

Organisation for Economic Co-operation and Development minimum wage database.

Authors’ calculation.

With new binding minimum wages in several sectors, municipalities in Germany faced a narrowing public–private gap in minimum pay. Accordingly, in one of the cases, the union successfully persuaded management to increase the share of in-house cleaners. The effect was less marked for waste services, where both managers and unions judged the impact of the (relatively low) sector minimum wage as limited. Instead, management efforts to insource waste provision responded to internal organizational pressures for access to revenue streams from a potentially lucrative waste collection business involving recyclable materials.

In three countries, a social clause in contracts for services was sometimes used to establish an alternative wage floor. This was common in Germany, but also evident in Sweden and the United Kingdom. Since EU procurement legislation prohibits discrimination against bidders, municipality managers were concerned that a minimum working conditions requirement risked legal disputes with unsuccessful bidders. In Germany, Nordrhein-Westfalen was one of the Länder to introduce pay clauses in some public contracts in the early 2000s (Schulten, 2012), and after 2010, a wave of Bundesländer passed legislation on pay clauses. This requires contractors to comply with either the extended collectively agreed pay rates for their sector (where applicable) or the minimum pay specified in the social clause, whichever is higher.

Employment status and organizational forms

Our third proposition, that variations in legal employment status influence the range of organizational forms used for outsourcing, has particular significance for France, Germany and Hungary given the specific legal status of some or all public sector employees and the differential concepts of private versus public law.

In France, many local government services are provided by enterprises wholly or partially owned by the municipality, including the longstanding Sociétés d’économie mixte (SEM) with public and private shareholders and the post-2010 Sociétés publiques locales (SPL) which are fully publicly owned (by at least two public bodies) and can be selected for outsourcing without a tender. In these public enterprises, staff are employed under private law. Managers claim that it facilitates greater flexibility over employment practices, whether paying higher wages than the municipality to attract and retain staff or changing working hours. Unions may also enjoy greater leverage to bargain for higher wages, as occurred in one of the cases in a private sector bus company.

German municipalities also make extensive use of public enterprises and joint public/private enterprises, giving rise to the term Konzern Stadt, or ‘corporate city’ (Grossi et al., 2010). One reason managers establish such enterprises is to provide a mechanism for insourcing services from private contractors; staff remain on employment contracts under private law but are covered by the public sector collective agreement. In Hungary, use of municipality-owned enterprises and joint ventures is common, and found in the two case studies in waste management and local transport. Workers employed in such enterprises (regardless of the share of public ownership) are covered by the Labour Code, not the civil service legal framework. However, managers are not free to bargain over pay as they are still controlled by the municipality. As in Germany, there is some evidence of insourcing services to increase control over revenue. In one case, waste services had been outsourced to a municipality-owned enterprise, which was subsequently partly acquired by a French multinational. When the company became profitable, the municipality took it back into public ownership, selling land and reinvesting profits to buy back shares.

Case studies in Sweden and the United Kingdom reveal a more straightforward public versus private choice for outsourcing, against the backdrop of equivalent legal status for public and private employees. Nevertheless, there was evidence of municipality-owned enterprises in waste collection and bus transport in Sweden and joint ventures in waste collection in the United Kingdom. Private for-profit companies had increased their presence in both countries in all five services investigated. In Sweden, the reasons related to municipal leaders’ political preferences, as well as demands for greater diversity of service providers (Elinder and Jordahl, 2013). In the United Kingdom, the rise of for-profit companies reflected pressures on municipality managers to reduce costs through outsourcing, given the significant public–private pay and industrial relations gaps.

Discussion

The data presented in this article suggest that labour market segmentation patterns have a strong influence on local government outsourcing decisions. However, a wide range of institutional factors influence the form of segmentation, which results in major differences in both incentives for outsourcing and its outcomes. The findings thus contribute to debates on the causes and conditions of persistent cross-national variation in public sector employment regimes. This variety prevails despite considerable pressures for convergence, from the spread of New Public Management initiatives, the austerity crisis and neoliberal reforms encouraging marketization (Bach and Bordogna, 2011; Kuhlmann, 2010). The research builds on studies that emphasize the influence of public–private gaps in employment conditions (especially pay and industrial relations processes) and in employment protection rules (particularly TUPE) (Cooke et al., 2004; Flecker and Hermann, 2011). Moreover, it extends the explanatory lens to a wider range of institutional influences. These include minimum wage rules and social clauses, legal differences in employment status between public and private sectors and the spectrum of public–private ownership forms that characterize contractor organizations.

The application of this broader framework reveals the complexity of outsourcing decisions among municipalities in the five countries. Not only was there no universal pattern of public–private pay and industrial relations gaps to generate one-way incentives towards outsourcing, but also no universal trade union opposition. The French case, where the union was reluctant to support insourcing of services, showed that even the lowest-grade local government workers may not be better paid than private sector employees. Their seniority pay had been squeezed as the national minimum wage has risen relative to the minima in municipalities, and works committees in joint enterprise companies were able to negotiate advantageous fringe benefits. By contrast, in the United Kingdom and to a lesser extent Germany, the cases confirmed that outsourcing still leads to lower pay, as found by studies more than two decades ago (Ascher, 1987; Colling, 1993). However, the outcome is due not to high public sector pay but to more exploitative practices in the private sector, where union protection is weak and outsourcing is used to drive down contractor fees and associated wages. Trade unions in all the German and UK cases therefore opposed outsourcing and supported efforts to insource services.

A second finding is that certain labour market rules can significantly reduce the segmentation effects of local government outsourcing. These include high statutory minimum wages, effective employment protection practices and social clauses in contracts. These results contribute to wider research debates about the capacity of institutional arrangements to shape countries’ experience of marketization and to reduce labour market segmentation (Lee and McCann, 2011). Likewise, they demonstrate that public authorities acting within ‘inclusive’ industrial relations systems can develop procurement as a ‘market embedding’ tool (Jaehrling, 2014).

Our evidence confirms that apparently similar institutions, such as statutory minimum wages and TUPE legislation, have heterogeneous effects across countries – what Deakin and Sarkar (2008) call ‘regulatory indeterminacy’ – because of different interlinkages with other institutions (especially public and private sector wage structures) and labour market conditions. Strong collective organization in the public and private sectors and small public–private pay gaps in Sweden reduce the cost attractiveness of outsourcing. Likewise, new sectoral minima in Germany raised the wage floor among contractors and extended it to those previously outside collective bargaining coverage, thereby lessening the cost attractiveness of outsourcing. This effect was compounded by a new low pay grade in the wage agreements for the municipalities and the Länder, and new pay clauses in procurement contracts. In France, by contrast, the high statutory minimum wage coupled with a freeze in the public sector wage indexation in 2011 and 2012 lessened union resistance to outsourcing and support for insourcing. Unions cited frustration over pay progression in municipalities and the greater capacity to win better pay deals in contractor organizations.

A third finding is that local government managers often choose from a spectrum of organizational forms, set up on different legal bases than the direct public service. These offer managers specific advantages in wage costs and labour flexibility, especially in France, Germany and Hungary where there is a direct intersection with diverse public and private employment statuses (Keller, 1999; Nacsa, 2014). These varying statuses provide differential opportunities for public sector managers to reduce costs, adapt pay to recruit and retain, or inject greater labour flexibility. The expansion of municipality-owned or part-owned enterprises in these three countries thus owes a good deal to the opportunity to shift workers’ employment status from public to private law. In 2012, France registered 43,600 public–private joint enterprises (SEM), in Germany more than two-fifths of the municipality workforce were covered by private law and employed either in municipal-owned or joint-owned enterprises, and in Hungary in 2011, 55 percent of municipalities had shares in business associations. France is likely to continue to pursue cost reduction through what can be called ‘internal-externalization’, increasing the share of non-fonctionnaires or establishing public enterprises with employees covered by private law. Moreover, 2009 legal reforms have provided incentives for hiring local authority employees on a contract basis, by allowing more flexible working conditions and often lower wages.

This article has highlighted the influence of labour market factors on outsourcing decisions. Our findings suggest that social clauses in procurement (covering pay and employment conditions) can reduce the risk of outsourcing municipality services purely on the basis of cost, to organizations which may lack the capacity or willingness to deliver quality services. However, despite interesting legal developments in Germany (Däubler, 2014) and the United Kingdom (Koukiadaki, 2014), the right under EU law to impose a social clause in procurement needs clarifying following the Rüffert ruling and the revised Public Procurement Directives announced in February 2014. Changes to EU competition law may be needed to enable calls for tenders to insist on appropriate pay and grading, training provision and explicit staffing levels.

Other factors are also significant, especially the ideological commitment to outsourcing displayed by central government officials and/or municipality managers and politicians; one example is the mantra of ‘private before public’ reported in the German cases. Where there is no strong political climate favouring marketization of services, as in Sweden, outsourcing may still take place but more for efficiency, flexibility or (as with the outsourcing of Hungarian bus services) to generate investment opportunities for the municipality. What was striking in all the cases was an absence of procedures to scrutinize or evaluate the processes and outcomes of procurement. There was limited evidence that outsourcing decisions were based on strong developed business cases or that unions were involved in assessing and monitoring decisions and outcomes. This is all indicative of the strength of ideological commitments to marketization. Overall, policy actions are needed to strengthen the inclusiveness of industrial relations structures so as to combat outsourcing decisions primarily based on exploitation and extension of workforce fragmentation.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/ or publication of this article: For generous funding, we are very grateful to the European Commission’s Directorate-General for Employment, Social Affairs and Inclusion and, in particular, for the support by the then Deputy Head of the Social Dialogue Unit, Andrew Chapman. The project reference is VS/2011/0141, Sub-programme ‘Improving expertise in the field of industrial relations’.

Author biographies

Damian Grimshaw and Jill Rubery are both Professors of Employment Studies at the University of Manchester, UK.

Dominique Anxo is Professor of Economics at the Linnaeus University, Sweden.

Maya Bacache-Beauvallet is Professor of Economics at Télécom ParisTech, France.

László Neumann is Senior Research Fellow at the Institute for Political Science, Hungarian Academy of Sciences, Budapest, Hungary.

Claudia Weinkopf is Deputy Director of the Institut Arbeit und Qualifikation (IAQ), University of Duisburg-Essen, Germany.

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