Pink Slip Politics: The Employment Effects of Privatizing Public Utilities

Opponents of privatization often argue that the divestment of public enterprises leads to a retrenchment of the workforce – particularly in the network industries. The displacement of workers is one of the most sensitive political issues surrounding privatization. However, the empirical literature available on this highly political relevant issue is quite scarce. This paper picks up this drawback and examines whether the privatization of network based utilities does indeed leads to a retrenchment of workforce. The panel data set includes 40 public enterprises operating in the postal and telecommunications sectors in 20 OECD countries in the period from 1980 to 2007. The empirical findings clearly show that privatization indeed leads to a downsizing of the enterprise’s workforce. However, in contrast to the common wisdom, not the private investors streamline the employment; the reduction of labour force was implemented while the state is still the unique shareholder. It begins with the transformation of the public enterprise into a joint stock company and ends with the start of the divestment of public shares. Furthermore, an intense competition also reinforces the lay off of employees induced by the material privatization. Finally, the results show that it makes a difference which party sells out the public enterprises. The displacement of workers in the course of material privatization is lower when leftist parties dominate the cabinet. Even though leftist parties do not impede privatization, they seem to attenuate the negative impact of privatization on the workforce.