Answer to Question #264135 in Economics for mel

Question

Is Privatization good or bad for employment?

Answer 1

In the article, John S. Earle points out that standard economic models of privatization imply that new private owners will increase productivity and reduce costs, which can lead to job losses and lower wages for workers. However, in discussions around productivity improvements and cost savings as a result of privatization, it is implicitly assumed that the firm's output remains constant.

For a certain level of production, an increase in labor productivity means a mandatory reduction in employment. But if cost reductions increase demand, or if new private owners are more entrepreneurial in marketing and entering new markets, then the firm's sales and output may expand. This large-scale effect of privatization will tend to increase employment, and therefore work in the opposite direction compared to the effect of productivity. If the large-scale effect is dominant, then the end result may be employment growth.

As for the impact of privatization on wages. Standard theoretical models assume that new private owners will lower the rates earned by public sector workers. New owners can also break tacit contracts and alienate quasi-earnings (return on specific investments by workers), as in hostile takeovers. However, the effect of cost-cutting can be reduced if privatized enterprises pay higher salaries to attract new workers or to stimulate workers. Private firms can earn and share more profits, and increased productivity means higher wages, given labor costs. Depending on the weight of these factors, wages can either rise or fall as a result of privatization.

Other factors can also determine the consequences of privatization. The intensity of operations of profit-oriented state-owned companies and companies can change under the influence of the changing business environment and competition. Also important is the extent to which new private owners will bring access to technology, markets, and improved skills, which implies increased production and employment. The negative effects on employment and income are likely to be greater if state-owned companies remain the most protected.

The theoretical analysis does not provide unambiguous predictions about the impact of privatization on employment and wages. The available empirical data are limited. The empirical evidence is in sharp contrast to the vast literature on privatization and firm performance and the well-known fears of workers about privatization. One study claims that US public sector employees oppose privatization because they expect it to result in lower wages and job losses. Trade unions have repeatedly protested against the planned privatization, for example, France Telecom and Gaz de France.