Do privatization and reducing state welfare benefits lead to a fall in unemployment?

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thanatassa | College Teacher | (Level 3) Educator Emeritus

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While some economists believe that privatization and reducing the social safety net will stimulate a country's economy, thereby reducing unemployment, much recent data shows that it gives rise to increased income inequality and slower wage growth.

The main rationale for privatization of government services is that it will cut costs. While it is true that firing adequately paid government workers and outsourcing services to private providers may appear to save money, in fact there are two extra costs that come as a result of privatization. First, since the new providers are for-profit companies, taxpayers are, in essence, paying for the profits of the shareholders and outsized executive salaries, rather than paying for middle class wages for government employees. Second, the private companies to which government services are outsourced often employ cheap temporary contract labor with no benefits, and thus the taxpayer is stuck with bills for food stamps and medicare for the underpayed labor. Essentially, privatization is often a method of transferring state assets from all citizens to a limited group of wealthy citizens.

Reducing state welfare payments without job training or other support mechanisms such as increased day care has only a minimal effect on employment and may have long term negative effects, such as forcing the unemployed out of homes into shelters and students to drop out of school, leading to a decline in future potential wages. For example, reducing the unemployment benefits for a high school drop out single mother with three children will not suddenly cause her to find a job; job training and day care may end up making her more employable. 

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