One of the foremost obstacles to privatization is resistance from state employees who fear the loss of their jobs. A key lesson learned from past privatizations around the world is that the anxieties and interests of public employees need to be addressed for privatization to be successful. Numerous privatization attempts have failed due to resistance from public employees and their unions. Given the incentives involved, it is unrealistic in the overwhelming majority of cases to expect to gain the full-fledged support of state employees for privatization. However, there are ways to gain the support of some affected state employees and lessen the resistance of others to privatization. (see Figure 3)

The first option is simply educating public employees about the effects of privatization. Most state employees do not lose their jobs as a result of privatization. A 1989 survey by the National Commission on Employment Policy (NCEP) of 86 city and county officials reviewed the effects of privatization on public and private employment. A total of 2,213 government workers were affected by contracting out 34 city and county services.[5] Of these employees, only 7 percent were laid off; 58 percent went to work for the private contractor; 24 percent were transferred to other government departments; and 7 percent retired.

Los Angeles County, which has one of the most extensive contracting programs in the country, eliminated 2800 positions between 1982 and 1987 through contracting out, but laid off only 34 public employees.

It is often claimed that the unemployment compensation paid by government for laid-off employees negate any cost savings from privatization. This claim is refuted by available evidence. The General Accounting Office, for instance, conducted a survey titled the "Costs and Status of Certain Displaced Employees." This study tracked Defense Department workers that were displaced through privatization and monitored how many of them applied for unemployment compensation, food stamps and other government relief programs. The study found that the costs of providing displaced workers with unemployment related services amounted to only one percent of the total budget savings from contracting out.[6]

Figure 3

Employee Adjustment and Incentive Techniques

One-time Bonus.  Public employees receive a one-time cash bonus for implementing privatization and relocating to another department or finding alternative employment.

Intercapital Funds.  Supervisors are rewarded financially for the cost savings or profits they are able to generate by contracting out services to the private sector.

Pension Plans.  Public workers could transfer pension credit to the private contractors' pension plan or could "rollover" retirement credit into an IRA. Alternatively public employees could be allowed to "cash out" their pension credit and receive a one-time lump sum.

First Consideration by Private Contractors.  States can require or encourage private contractors to give first consideration to public employees for new positions.  In Los Angeles County, for instance, bonus points were awarded to bidders who furnished public employee accommodation plans.

Severance Pay.  Another way to ease the transition for public employees is by distributing severance pay to workers who are displaced by privatization.  British Airways, which was privatized in 1987, offered voluntary severance pay to its employees.  Many then used the severance pay to start their own businesses.

Employee Buyouts.  Another possibility is to give public employees the opportunity to gain a positive stake in the privatization by allowing them to take their departments private.  Employees could purchase public services/departments through Employee Stock Ownership Plans (ESOPs) and operate them as private enterprises.  Employee buyouts of government enterprises and services have been successfully conducted in Britain and British Columbia and are now being widely employed in Eastern Europe and Russia.

Many of the employee buyouts in Britain were of public transit lines.  Yorkshire Rider and Grampian Transport, for instance, were both spun off from local governments.  In the late 1980s, British Columbia privatized all highway maintenance by dividing the road system into 28 areas and contracting maintenance out to private firms.  Encouraging employees to form their own firms was a major goal of the highway maintenance privatization.  Employee groups were given five-percent preferences and the opportunity to bid first on contracts.  The result: of the 28 multi-year contracts, ten were granted to companies composed of former state employees.

Governments can assist and encourage public employee buyouts in other ways.  For instance, the new employee-owned firms could be allowed to use government warehouses, storage areas, and/or repair facilities for a fixed time period.  This temporarily postpones the financial obstacle of immediately having to purchase expensive machines or buildings.  Other forms of assistance to encourage employee buyouts include, guarantee of first-round contract, one-time loans, and debt write-offs.


The principal strategy employed to minimize public employee job loss is to rely on normal yearly attrition, which averages around 5 percent in most jurisdictions.[7] After contracting with a private firm to provide a service, public employees currently performing that function are transferred to other departments and no new workers are hired. In many cases, generous early retirement incentives are also offered to workers to reduce the size of the current workforce.

Policymakers can employ a number of other techniques and incentives to facilitate the transition of public employees and diffuse their opposition to privatization.[8] Figure 3 presents several such techniques.