How is the public sector inefficient

Myth: The public service sector is inefficient and far too expensive

The public service sector is inefficient and costs too much money. So much for the neoliberal creed. But what about the quality of the public service sector? And: Can privatizations actually help make the sector more efficient and reduce the budget deficit?


The public service sector, which includes the areas of public administration, education, health care, waste and sewage disposal, post and telecommunications, as well as the entire energy and water supply as well as public transport, is of great importance both quantitatively and qualitatively . In addition to the jobs created directly, the public service sector secures many other (often regional) jobs through its investments: Craftsmen benefit from repair work on sewage treatment plants or in schools, and industry benefits from new orders for rails and rail vehicles.

The jobs in the public service sector are not only of great importance in quantitative terms, but also qualitatively, since working conditions and job security are generally much better or higher than those in the private service sector.

The relatively good working conditions and good training in the public service sector not only pay off for those employed there, but also have an impact on the structure of the entire Austrian economy. The public (service) sector, for example, provides a large number of people with good vocational training, which even decades later has positive effects on the job market opportunities of those affected.

In addition, the public service sector can also be used as a countercyclical employment policy instrument, in that more new employees are hired in times of particularly high unemployment.

High quality and great satisfaction

A Sora survey carried out on behalf of the Chamber of Labor in 2012 also shows that Austrians are very satisfied with the quality of services of general interest. The customer rights, information about the offer, the service in the event of problems and the security of supply or accessibility are almost consistently rated as good or even very good for the areas surveyed (water supply, telecommunications facilities, public city transport, postal services, rail services and energy supply). Since public services are usually equally available to everyone, they also have a positive distribution effect. Analyzes also show that the wage dispersion in the public service sector is lower than in the private sector.

The high quality of services of general interest not only enjoys a high level of acceptance among the population and helps to achieve social and ecological goals of society, but is an important location factor for companies and thus also contributes to the economic well-being of a country.

Privatization is not a cure

Nevertheless, there are repeated calls for more companies in the public service sector to be privatized and for further liberalization steps to be taken. In essence, the following arguments are put forward:

Public service sectors are inefficient and only privately run companies in genuinely competitive markets can eliminate these inefficiencies. The elimination of inefficiencies could then be used to reduce the prices of public services while maintaining the same quality. In close connection with this, it is sometimes even claimed that privatizations could lead to more innovations in the public service sector. It is also often pointed out that privatizations could help to reduce the budget deficit.

But are these arguments even true? The first argument is at least very dubious, as it is deliberately concealed that private companies want to make a profit and usually spend a lot of money on advertising. So that privatization can really lead to price reductions, the efficiency gains (if any) brought about by the privatizations must be higher than the additional profits and the additional advertising expenditure. This is usually not the case. In addition, privatizations and liberalizations do not automatically lead to more competitive markets. In some cases, privatizations and liberalizations even lead to increased corporate concentration and thus less competition.

In addition, the question of whether the public service sector really acts more inefficiently than the private service sector is an unresolved one. Basically, companies have two options to compete in competitive markets: On the one hand, they can try to reduce labor costs as far as possible (e.g. by increasing workload among individual employees, downsizing and / or lowering wages), or they can compete for which company is more innovative and thus delivers the better quality. Strong wage regulations, which are usually the rule in public companies, prevent competition on labor costs and thus promote competition on quality and therefore also have an effect that promotes innovation and increases productivity.

So privatizations usually do not lead to price reductions. On the other hand, privatizations often entail hidden costs because the public companies stop social or ecological tasks that they had previously taken on after privatization for cost reasons. For example, if a company saves by investing less in apprenticeship training, the state must invest more money in state training workshops. This may be a win for the company, but from a macroeconomic perspective it is a zero-sum game.

The statement that privatizations can help to reduce the budget deficit is also highly dubious. If one looks at the privatizations of the last few years, one can see that the last privatizations have cost the public budgets more money than they brought in

In addition to these financial considerations, there are, however, more fundamental considerations as to why further privatizations in the public service sector would have negative consequences. Many services of general interest are also in public hands because a market-like organization would not be possible because it is a natural monopoly. This is the case, for example, with electricity networks, water supply facilities or a country's rail network. In addition, privatizations also mean a loss of steering and control for the state, which means nothing other than that the state has fewer opportunities to implement its policies. State companies can also be used to pursue more social and ecological goals.

Privatizations: Dangers to Employees

For employees, privatizations usually mean downsizing, falling wages and increasing work pressure. In Austria, for example, employment in the electricity industry fell by 25% between 1995 and 2006. Employment in the postal and private courier services has even decreased by 29%. And the degree of organization of the trade unions in the private service sector is also well below that in the public service sector. The degree of organization of the former German postal monopoly is around 80%, while the degree of organization of private competitors is hardly more than ten percent.

From a social, ecological and economic point of view, there is a lot to be said against privatization of public services. Contrary to hopes, the privatization results are not satisfactory either in terms of price or quality of services. The effects are particularly dramatic for the workers concerned, who have to pay for the privatization with layoffs, lower wages and increasing pressure.

This article was published in a slightly modified version in the economy and environment: