The Public Spending and Employment Effects of Local Service Contracting

This paper extends the demand-oriented models of local expenditure and employment determination by incorporating a measure of service contracting—the percent of local services externally produced. In the case of expenditures, we estimate a median-voter model which includes the contracting measure. In the case of employment, we estimate a local public sector labor market model with the contracting measure in the labor demand equation. Based on a sample of 500 U.S. cities, we find that public expenditures and employment decrease as the extent of contracting increases. However, the magnitude of the coefficients is rather small.