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Labour substitution and the scope for military outsourcing

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  • MacDonald, Peter

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.

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File URL: http://mpra.ub.uni-muenchen.de/46688/1/MPRA_paper_46688.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 46688.

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Date of creation: Mar 2013
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Handle: RePEc:pra:mprapa:46688
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Keywords: defence; contracting out; military labour;

Find related papers by JEL classification:

  • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
  • H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets
  • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
  • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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  1. Henry Ohlsson, 2003. "Ownership and Production Costs: Choosing between Public Production and Contracting-Out in the Case of Swedish Refuse Collection," Fiscal Studies, Institute for Fiscal Studies, vol. 24(4), pages 451-476, December.
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  11. Pesaran, M. H. & Taylor, L.W., 1997. "Diagnostics for IV Regressions," Cambridge Working Papers in Economics 9709, Faculty of Economics, University of Cambridge.
  12. Peter Macdonald, 2006. "Capital-Labour Substitution In Uk Armed Forces," Defence and Peace Economics, Taylor & Francis Journals, vol. 17(2), pages 141-153.
  13. Antonio Ciccone & Giovanni Peri, 2005. "Long-Run Substitutability Between More and Less Educated Workers: Evidence from U.S. States, 1950-1990," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 652-663, November.
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  15. repec:cup:cbooks:9780521447287 is not listed on IDEAS
  16. Martimort, David & Pouyet, Jerome, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 393-411, March.
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