Wages and Contracting Out: Does the Law of One Price Hold?
| Published date | 01 March 2008 |
| DOI | http://doi.org/10.1111/j.1467-8543.2007.00665.x |
| Author | Samuel Berlinski |
| Date | 01 March 2008 |
Wages and Contracting Out:
Does the Law of One Price Hold?
Samuel Berlinski
Abstract
We find that, conditioning on industry of assignment, cleaners and security
guards who participate in activities organized by contract companies earn 15
and 17 per cent less, respectively, than workers in those activities organized
in-house. These estimates are hardly affected by the inclusion of a set of jointly
statistically significant exogenous variables. We can expect that most of the
productive traits that characterize a task are transferred to the contractor in the
process of contracting out a cleaning or security task. Thus, our findings are
hard to rationalize by a simple competitive labour market setting where the law
of one price holds.
1. Introduction
Outsourcing or contract companies are paid to perform a task (e.g. cleaning)
that a firm wants to (partially or completely) outsource during a certain
period of time. The contract company organizes and supervises the work that
is carried out by its own employees and bears all the legal responsibilities of
the employment relationship. In a competitive labour market, the law of one
price holds. Therefore, competition forces the wage of a worker — the price
of the labour input — to depend only on the nature of the task to be
performed and her skills but not on who employs the worker. In this article,
we test this hypothesis by comparing the earnings of observationally similar
individuals, performing observationally similar tasks but who differ accord-
ing to whether they are part of an activity organized by an outsourcing
company or in-house. In particular, we look at the earnings of cleaners and
security guards conditioning on industry of assignment.
An example will help illustrate the basic features of the test we pursue.
Consider the case of two banks, Bank A and Bank B, located in a big city.
Bank A has a large operation with hundreds of branches open across the city.
Bank B, however, has only a small number of branches open in this city. Bank
Samuel Berlinski is at the University College London and Institute for Fiscal Studies.
British Journal of Industrial Relations doi: 10.1111/j.1467-8543.2007.00665.x
46:1 March 2008 0007–1080 pp. 59–75
© Blackwell Publishing Ltd/London School of Economics 2007. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
Ahas a maintenance division that, among other activities, is in charge of
hiring and managing workers assigned to cleaning and janitorial activities at
its branches. By reason of the small scale of its business in this city, Bank B
does not have a maintenance division and outsources all cleaning and jani-
torial activities to Cleaners X for a monthly fee. Cleaners X buys inputs and
hires and manages workers for the whole cleaning and janitorial activities
required for Bank B’s operation.
Cleaners X serves clients in other industries as well and is one of many
companies in the city that provides cleaning and janitorial services. Bank A,
Cleaners X and all other employers of cleaners in the city compete for
workers. We expect the nature of the cleaning activity in Bank A and Bank B
to be similar. Therefore, in a competitive labour market workers should
receive a similar compensation independently of whether they are paid by
Bank A or Cleaners X.
The Contingent Workers and Alternative Employment Arrangements
supplements to the Current Population Survey (CPS) collects detailed infor-
mation on workers who are hired by outsourcing companies. In particular,
industry of assignment is provided for contract company workers who
perform their job with one customer and at the customer’s worksite. We use
these data to construct two samples, one of cleaners and one of security
guards, who perform their jobs in the private sector and are not unionized.
Some of these individuals participate in activities organized by a contract
company and others in tasks organized in-house. This article is, to our
knowledge, the first to look at wage differentials between contract-out and
in-house workers using industry of assignment (i.e. where the activity takes
place) to control for the myriad of unobserved traits that characterizes the
worker-job match. Moreover, the fact that in our sample contract-out
workers only work for one customer and at the customer’s worksite, make
these data very well suited for our research question. In particular, under
these conditions, it is reasonable to assume that within industries, in-house
and contracted-out tasks are similar.
The rest of the article is organized as follows. In Section 2, we briefly
discuss related literature. In Section 3, we explain the empirical framework of
the article. In Section 4, we introduce the data, provide descriptive statistics
and our main findings. In Section 5, we look at possible explanations for the
sizeable wage gaps. We conclude with Section 6.
2. Related literature
In recent years, there has been an increasing interest in understanding the
growing tendency of firms to rely on temporary help workers,1production
subcontracting and contracting out of business support services. Abraham
(1990) and Abraham and Taylor (1996) recognize three motivations that lead
to the use of these practices: flexibility in staffing levels, the ability to reduce
per-hour labour costs, and economies of scale in the provision of specialized
60 British Journal of Industrial Relations
© Blackwell Publishing Ltd/London School of Economics 2007.
To continue reading
Request your trial