In-house or outsourced public services? A social and economic analysis of the impact of spending policy on the private wage share in OECD countries

This article analyses the relationship between government spending and the distribution of private income between capital and labour. While most previous research assumes that government spending redistributes in favour of the less wealthy, I distinguish between types of expenditures that enhance the bargaining position of labour – that is, unemployment benefits, public sector employment and investment in new capital – and labour-saving and pro-business types of expenditures – that is, outsourcing to private firms. The results are derived from various panel regression techniques on a panel of 19 Organisation for Economic Co-operation and Development (OECD) countries in the period 1985–2010 and show that expenditures on public sector employment and, to a lesser extent, on new capital prevented the private wage share from declining further, even after controlling for labour market institutions, globalisation and technological change. Conversely, expenditures on outsourcing substantially contributed to reducing the private wage share. Unemployment benefits had a non-significant and negative effect on the private wage share because their increase was the consequence of higher levels of unemployment rather than policy. Implications for theory and policy are drawn, including the support for a public employment-led spending policy.