Labour substitution and the scope for military outsourcing

MacDonald, Peter (2013): Labour substitution and the scope for military outsourcing.

Abstract

Abstract This article argues that the observed elasticity of substitution between military and civilian labour within a defence ministry provides an indication of the likely scope for efficient outsourcing of military services. Military labour can only be employed by government, so outsourcing military services to private firms requires replacement of military labour with civilian labour. The degree to which such substitution occurs under in-house provision offers an insight into how much may be undertaken through outsourcing without compromising operational effectiveness. We obtain an estimate of the elasticity of substitution between military and civilian labour in the UK over the period 1970 and 2008 by estimating the Ministry of Defence's relative demand for military labour. Instruments based on the relative supply of military labour are used to account for the endogeneity of relative wages. The long run elasticity is estimated to be around 0.75, though a value of 1 cannot be rejected. The estimated elasticity suggests that there remains scope for further outsourcing of military activities in the UK.

• Item Type: MPRA Paper
• Language: English
• Keywords: defence, contracting out, military labour
• Subjects: H - Public Economics > H1 - Structure and Scope of Government > H11 - Structure, Scope, and Performance of Government; H - Public Economics > H4 - Publicly Provided Goods > H44 - Publicly Provided Goods: Mixed Markets; H - Public Economics > H5 - National Government Expenditures and Related Policies > H56 - National Security and War; H - Public Economics > H5 - National Government Expenditures and Related Policies > H57 - Procurement

References

Albrecht, M. (1979) Labor substitution in the military environment: implications for enlisted force management, Rand Report R-2330-MRAL, RAND, Santa Monica.

Anagboso, M. and Spence, A. (2008) Scoping paper on possible improvements to measurement of defence in the UK National Accounts. Newport: Office for National Statistics. Available at http://www.ons.gov.uk/ons/guide-method/ukcemga/publications-home/publications/archive/scoping-paper-on-possible-improvements-to-measurement-of-defence-in-the-uk-national-accounts.pdf (accessed 10 January 2013).

Andersson, F. and Jordahl, H. (2011) Outsourcing public services: ownership, competition, quality and contracting. IFN Working Paper No. 874. Research Institute of Industrial Economics, Stockholm.

Angrist, J. D. and Pischke, J.-S. (2009) Mostly Harmless Econometrics: An Empiricists Companion, Princeton University Press, Princeton, New Jersey.

Bailey Grasso, V. (2012) Circular A-76 and the moratorium on DOD competitions: Background and issues for Congress, Congressional Research Service Report R40854. Available at http://digital.library.unt.edu/ark:/67531/metadc83929/m1/1/high_res_d/r40854_2012jan17.pdf (accessed 11 June 2012).

Baum, C. F., Schaffer, M. E. and Stillman, S. (2003) Instrumental variables and GMM: estimation and testing, The Stata Journal, 3, 1-31.

Baum, C. F., Schaffer, M. E. and Stillman, S. (2007) Enhanced routines for instrumental variables/generalized method of moments estimation and testing, The Stata Journal, 7, 465-506.

Bel, G. and Warner, M. (2008) Does privatization of solid waste and water services reduce costs? A review of empirical studies, Resources, Conservation and Recycling, 52, 1337-1348.

Camm, F. and Greenfeld, V. A. (2005) How Should the Army Use Contractors on the Battlefield? Assessing Comparative Risk in Sourcing Decisions, RAND, Santa Monica.

Ciccone, A. and Peri, G. (2005) Long-run substitutability between more and less educated workers: Evidence from US States 1950-1990, Review of Economics and Statistics, 87, 652-663.

Department for Education (various years) Education Statistics UK/Education and Training Statistics UK, HMSO/TSO, London.

Domberger, S., Jensen, P. and Stonecash, R. (2002) Examining the magnitude and sources of cost savings associated with outsourcing, Public Performance & Management Review, 26, 148-168.

Domberger, S., Meadowcroft, S. and Thompson, D. (1986) Competitive tendering and efficiency: the case of refuse collection, Fiscal Studies, 7, 69-89.

Dunn, M., Egginton, B., Pye, N., Taylor, T. and Watters, B. (2011) The Defence Reform Agenda, RUSI Briefng Paper, June 2011.

Fredland, J. E. (2004) Outsourcing military force: a transactions cost perspective on the role of military companies, Defence and Peace Economics, 15, 205-219.

Fredland, J. E. and Kendry, A. (1999) The privatisation of military force: economic virtues, vices and government responsibility, Cambridge Review of International Affairs, 13, 147-164.

Gates, R. (2009) DoD news briefing with Secretary Gates from the Pentagon, 6 April 2009. Transcript available at http://www.defense.gov/transcripts/transcript.aspx?transcriptid=4396 (accessed 6 January 2013).

Geren, P. and Casey, G. (2009) A statement on the posture of the United States Army, Submitted to the Committees and Subcommittees of the United States Senate and House of Representatives, 1st Session, 111th Congress, May 2009.

Heidenkamp, H. (2012) Sustaining the UK's defence effort: contractor support to operations market dynamics, RUSI Whitehall Paper 2-12.

House of Commons Defence Select Committee (2005) Duty of Care, Third Report of Session 2004-05, Vol. II HC63-II, TSO, London.

Iossa, E. and Martimort, D. (2008) The simple micro-economics of Public-Private Partnerships, CMPO Working Paper No. 08/199, University of Bristol, Bristol. 20

Jensen, P. H. and Stonecash, R. E. (2005) Incentives and the efficiency of public sector outsourcing contracts, Journal of Economic Surveys, 19, 767-787.

Johnson, G., Scholes, K. and Whittington, R. (2005) Exploring Corporate Strategy, Pearson Education, Harlow, 7 edn.

Katz, L. F. and Murphy, K. M. (1992) Changes in relative wages, 1963-1987: Supply and demand factors, Quarterly Journal of Economics, 107, 35-78.

Kleibergen, F. and Paap, R. (2006) Generalized reduced rank tests using the singular value decomposition, Journal of Econometrics, 133, 97-126.

Kulmala, H. I., Ojala, M., Ahoniemi, L. and Uusi-Rauva, E. (2006) Unit cost behaviour in public sector outsourcing, International Journal of Public Sector Management, 19, 130- 149.

Leung, S. F. and Yu, S. (2001) The sensitivity of the RESET tests to disturbance autocorrelation in regression analysis, Empirical Economics, 26, 721-726.

MacDonald, P. (2006) Capital-labour substitution in UK armed forces, Defence and Peace Economics, 17, 141-153.

Martimort, D., De Donder, P. and Billette de Villemeur, E. (2005) An incomplete contract perspective on public good provision, Journal of Economic Surveys, 19, 149-180.

Martimort, D. and Pouyet, J. (2008) To build or not to build: Normative and positive theories of Public-Private Partnerships, International Journal of Industrial Organization, 26, 393-411.

Ministry of Defence (2004) Delivering Security in a Changing World: Future Capabilities, Cm 6269, TSO, London.

Ministry of Defence (various years) UK Defence Statistics, HMSO/TSO, London.

National Audit Office (2006) Recruitment and Retention in the Armed Forces, HC1633, Session 2005-06, TSO, London.

National Audit Office (2007) Transforming logistics support for fast jets, HC825, Session 2006-2007, TSO, London.

National Audit Office (2008) Allocation and management of risk in Ministry of Defence PFI projects, HC343, Session 2007-2008, TSO, London.

National Audit Office (2010) Ministry of Defence: Delivering multi-role tanker aircraft capability, HC433, Session 2009-2010, TSO, London.

NATO (2007) Recruitment and retention of military personnel, Final report of Research Task Group HFM-107, RTO Technical Report TR-HFM-107 NATO, Brussels.

Office for National Statistics (various years) Annual Abstract of Statistics, HMSO/TSO, London.

Ohlsson, H. (2003) Ownership and production costs: choosing between public production and contracting-out in the case of Swedish refuse collection, Fiscal Studies, 24, 451-476.

Pesaran, M. H. and Taylor, L. W. (1999) Diagnostics for IV regressions, Oxford Bulletin of Economics and Statistics, 61, 255-281.

Propper, C., Burgess, S. and Gossage, D. (2008) Competition and quality: evidence from the NHS internal market 1991-1999, The Economic Journal, 118, 138-70.

Ridge, M. and Smith, R. (1991) UK military manpower and substitutability, Defence Economics, 2, 283-93.

Sandler, T. and Hartley, K. (1995) The Economics of Defence, Cambridge Surveys of Economic Literature, Cambridge University Press, Cambridge.

Schwartz, M. and Swain, J. (2011) Department of Defense Contractors in Afghanistan and Iraq: Background and Analysis, CRS Report R40764, Congresional Research Service, Washington, D.C.

Secretary of State for Defence (various years) Statement on the Defence Estimates, vol. II, HMSO, London.

Smith, R. P., Humm, A. and Fontanel, J. (1987) Capital-labour substitution in defence provision, in Defence, Security and Development (Eds.) S. Deger and R. West, Frances Pinter, London.

Smoker, R. (1979) Cost as a criterion in determining the mix of military and civilian personnel, in Defense Manpower Policy: Presentations from the 1976 RAND conference on defense manpower (Ed.) R. Cooper, R-2396-ARPA, RAND, Santa Monica.

Stevens, B. (1978) Scale, market structure and the cost of refuse collection, The Review of Economics and Statistics, 60, 438-448.

Stock, J. H. and Yago, M. (2005) Testing for weak instruments in linear IV regression, in Identification and Inference for Econometric Models: Essays in Honour of Thomas Rothenberg (Eds.) D. W. Andrews and J. H. Stock, Cambridge University Press, Cambridge.

Taylor, T. and Tatham, P. H. (2008) Five key challenges for the management of defence: an agenda for research?, International Journal of Defense Acquisition Management, 1, 22-38.

US Government Accountability Office (2005) (2005) Defense Management: DoD Needs to Demonstrate That Performance-Based Logistics Contracts Are Achieving Expected Benefits., GAO-05-966, Washington, D.C.

Uttley, M. (2005) Contractor on Deployed Military Operations: United Kingdom Policy and Doctrine, Strategic Studies Institute, Carlisle, Pennsylvania.

Warner, J. W. and Asch, B. (1995) The economics of military manpower, in Handbook of Defense Economics (Eds.) K. Hartley and T. Sandler, Elsevier Science B.V., Amsterdam, vol. 1.

Warner, J. W. and Negrusa, S. (2006) The economic case for all-volunteer forces, in Service to Country: Personnel Policy and the Transformation of Western Militaries (Eds.) C. Gilroy and C. Williams, MIT Press, Cambridge, MA. 24