CONTRACTING OUT, PUBLIC POLICY AND ENTREPRENEURSHIP
| DOI | http://doi.org/10.1111/j.1467-9485.2010.00510.x |
| Published date | 01 May 2010 |
| Author | Simon C. Parker |
| Date | 01 May 2010 |
CONTRACTING OUT, PUBLIC POLICY
AND ENTREPRENEURSHIP
Simon C. Parker
n
Abstract
Relatively little is known about the impact of public policies on the decisions of
firms to contract out parts of their production, despite widespread growth in this
practice. The present paper uses a simple principal-agent model to explore the
effects of various public policies which affect employers’ incentives to outsource by
re-grading their employees as independent self-employed contractors. Minimum
wages are predicted to increase contracting out, as are payroll and income taxes
under several plausible conditions, including worker preferences exhibiting constant
relative risk aversion.
I Intro ductio n
We still know relatively little about the impact of public policies on the decisions
of firms to contract out production to outside agents. This is despite general
growth in the number and value of services being contracted out, as observed for
example by Abraham and Taylor (1996) in US services and by Haskel (1999) in
UK manufacturing. At the same time as contracting out as a phenomenon is
gaining in importance, evidence is emerging that links it with productivity
improvements, wage growth, and increasesin average living standards (Fixler
and Siegel, 1999; ten Raa and Wolff, 2001). Contracting out is often
concentrated in particular sectors, such as cleaning services, security services,
data processing and systems analysis (Rojot, 1989).
1
It is also common in the
business sector, where it has fuelled employment growth in engineering and
architectural services; accounting, auditing and bookkeeping services; and
computer and data processing services (Abraham and Taylor, 1996). The growth
ofcontracting out has also coincided with secular declines in trade unionism in
the United States and United Kingdom (Perry, 1997). Thus, for a whole range of
reasons, contracting out is an important economic phenomenon, whose public
policy implications are of interest to scholars and policy-makers alike.
n
Richard Ivey School of Business, University of Western Ontario, London, ON, Canada.
1
Other terms also used in the literature are ‘subcontracting’ and ‘outsourcing’: see Deavers
(1997) for a discussion. We shall take these terms to be equivalent for the purposes of the
present article. ‘Offshoring’ on the other hand is associatedspecifically with contracting out
activities to workers in other countries; it is not the focus of this article.
Scottish Journal of Political Economy, Vol. 57, No. 2, May 2010
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Journal compilation r2010 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
119
Although there is a paucity of hard data on the levels and trends of
contracting-out in contemporary labour markets, there is suggestive evidence
that contracting-out helped fuel the growth of self-employment in the United
States and United Kingdom in the 1980s (Clinton, 1997; Purcell and Purcell,
1998; Weir, 2003). For example, Purcell and Purcell (1998) analysed UK Labour
Force Survey (LFS) data between 1986 and 1996 and reported a near-50%
increase in the proportion of employees classified as temporary contractors, to
just under 4% of all workers. The largest increases of this type took place among
professional as well as lower-skilled service workers. These increases are directly
linked to self-employment; LFS data from 2007 show that nearly 10% of the
self-employed now have their former employer as their primary client.
Furthermore, it appears that the growth in contracting-out is not just an
Anglo-Saxon phenomenon, but instead characterises all major west European
countries (Brewster et al., 1997; Tregaskis et al., 1998). Even though there can be
cross-country differences in the motives for contracting-out (e.g. Europe and the
United States: Kakabadse and Kakabadse, 2002), the trend seems to be a
common one.
Policy-makers are especially interested in contracting out as a means of
containing wage costs and stimulating efficiency, and as a vehicle for promoting
entrepreneurship. The Thatcher administrations contracted out cleaning work
from the British National Health Service in the 1980s. As another example, in
the 1990s over 35,000 workers became hired as self-employed teaching staff at
further education colleges, often at colleges where they were previously directly
employed (Purcell and Purcell, 1998, p. 40). And in the 2000s, the Blair
administrations encouraged British local government workers to tender for
rights to deliver local services such as refuse collection which have traditionally
been sourced in-house. However, apart from outsourcing their own central
services, governments seem to lack direct policy instruments to promote it in the
broader economy.
The central question explored in this article is whether indirect policy
instruments affect contracting out, in particular well-known public policies such
as payroll and income taxes, employment protection legislation, and minimum
wages. Many previous researchers have analysed how these policies affect labour
supply and participation decisions, and unemployment; yet their effects on the
organisation of firms and industrial structure might be no less profound. Hence
one of the contributions of this article is to explore a new dimension of the
impact of these public policies on the private sector.
By way of example, consider the construction industry, which in Europe
contains a mixture of employers, employees and self-employed contractors
(Briscoe et al., 2000). Several commentators have observed that the construction
industry goes through waves of contracting out which seem to respond to
changes in the rates and enforcement of payroll taxes (Briscoe et al., 2000;
Bo
+heim and Muehlberger, 2006). In Britain, this has prompted HM Revenue
and Customs to tighten up eligibility rules for workers in this sector to be
classified as self-employed, culminating in the Construction Industry Scheme
introduced in April 2007, which classified contractors even more stringently than
SIMON C. PARKER120
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Journal compilation r2010 Scottish Economic Society
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