Recent years have seen the rise in popularity of domestic outsourcing – a practice where firms hire non-foreign third-party providers to perform tasks or services previously done in-house. Commonly outsourced tasks are those peripheral to the firm’s central functioning: cleaning, security, logistics, HR, and IT, to name a few examples. While domestic outsourcing can help firms cut costs and enhance efficiency, the impact on the broader labor market is controversial and little understood. Economic theory offers a range of perspectives, but empirical evidence on the effects of domestic outsourcing is scarce. 

New research by Mayara Felix, an assistant professor of economics and global affairs at Yale’s Department of Economics and Jackson School of Global Affairs, seeks to address this knowledge gap. In joint work with Michael B. Wong, Felix’s classmate at MIT and now an assistant professor at the University of Hong Kong, Felix uses an unexpected policy change as an ‘exogenous shock’ to analyze the effects of outsourcing on workers, firms, and the broader labor market. Their paper focuses on Brazilian security guards, an occupation that was heavily impacted by a sudden increase in domestic outsourcing and which already accounted for 5% of total male formal employment at the time. But Felix also had a personal reason for researching this topic: when she was growing up in northeast Brazil, her father worked as an outsourced security guard.

From Brazil to New Haven: An unconventional path

Felix was born in a working-class neighborhood on the outskirts of Olinda, a coastal city in northeast Brazil. Her mother was a high school math teacher, and her father worked as a police officer and part-time outsourced security guard.

From a young age, Felix was a devoted student who loved math. But during high school, she learned that math was not a lucrative career in Brazil, so she began to pursue a career in law – hoping to become a civil servant and secure a stable income for her family. Thanks to a US State Department program that helps low-income students apply to US colleges, she ultimately enrolled as a math student at Mount Holyoke, a women’s college in Massachusetts. It was there that she discovered her passion for economic research. 

“I wanted to understand some of the fundamental problems I saw growing up in Brazil, such as inequality and the perception that capital has absolute power over labor,” Felix said in an EGC interview, noting her conviction that research was critical for understanding and addressing such complex development constraints.

After graduating from Mount Holyoke with a degree in economics and math, Felix completed her Ph.D. in economics at MIT before arriving at Yale in 2023.

Domestic Outsourcing & workers: winners or losers?

As domestic outsourcing has increased, so have the debates over its effects. On one hand, outsourcing can have positive economy-wide effects: firms that outsource non-core activities can focus on their comparative advantages, reducing costs and increasing efficiency – ultimately leading to higher employment and wages across the economy. On the other hand, a firm’s decision to outsource a job will negatively affect the workers who previously performed it: many workers lose their jobs or experience wage declines as they are substituted by cheaper outsourced labor. Who wins and who loses from domestic outsourcing? On net, are there gains or losses? 

To address this question, Felix identified a 1993 ruling by Brazil’s Supreme Court to legalize domestic outsourcing as a useful “natural experiment” – or observational study to assess the impacts of an historical event or policy intervention. The court’s decision ended a period of legal uncertainty regarding the practice when it officially legalized outsourcing the of all non-core activities. Following the ruling, firms rapidly outsourced labor. This effect was strongest in the South of Brazil, where prior to legalization labor courts had a restrictive stance on outsourcing, tending to rule the practice illegal in labor lawsuits.

It turns out that Felix’s father ability to find work as an outsourced security guard was not that unusual: security guards were the most significantly outsourced occupation after the 1993 legalization. This prompted Felix and Wong to focus on the security guard occupation in their analysis, using highly detailed administrative data. Once outsourcing was legalized, a significant proportion of security guards lost their jobs, while the number of outsourced guards rose steadily – between 1992 and 1997, the proportion of outsourced security guards in previously restrictive regions rose from 32 percent to 55 percent.

To enhance the robustness of their analysis and minimize the interference of other labor market factors in the Brazilian economy during the 1990s (i.e., trade liberalization), Felix and Wong compared wage and employment data across three distinct dimensions: before versus after legalization, restrictive versus permissive regions, and security guards versus 12 other less affected occupations. Through these comparisons, Felix estimated the effects of the 1993 ruling at the micro level (i.e., on incumbent workers) and at the macro level (i.e., on labor market outcomes like total employment and demographic-adjusted wages).

The results showed that the legalization of domestic outsourcing in Brazil negatively affected incumbent security guards: they were largely displaced from the guard occupation, lost 10 percent of their pre-legalization wages, and never recovered. However, the results also show that total employment of security guards increased by 5 percent after the ruling, and that wages of demographically similar Brazilian security guards did not decline.

What explains this apparent discrepancy? The analysis revealed that the new, formal-sector security guard jobs were largely taken by young men between the ages of 18 and 24 – many of whom were previously unemployed or working in poorly-paid informal occupations. In other words, while older, incumbent security guards were displaced to lower-paying firms and lower-paying occupations after the 1993 ruling, the security guard occupation itself flourished, generating many more jobs, this time taken by the young. Overall, legalizing outsourcing expanded the security guard occupation and shifted its demographics from older to younger workers.

“Job creation, especially formal sector job creation, and especially for young men, is a major issue in Brazil and other countries struggling with issues of crime and unemployment,” she said. “I was delighted to learn that a market-driven policy as simple as outsourcing of non-core activities can deliver results on that front.” 

Felix also notes that it’s understandable why outsourcing is so controversial: the losses experienced by incumbents can be directly attributed to firms’ decision to outsource. But what it’s harder to see is the flip side of the coin: the many more jobs created because outsourcing allows all sorts of firms to hire security services, not only those firms that are large enough to be able to afford the high costs associated with recruitment, training, and supervision of security guards. Contract firms make this process cheap by operating at scale. “I hope that our paper can help inform, with evidence, this important policy debate.” 

“This is one of the first empirical papers to provide evidence from natural experiments that shows these productivity gains, which sustain a 5% increase in employment, at the local labor market level,” she said. “It is also the first paper to provide direct evidence that not all workers lose from domestic outsourcing: young men, like my father, benefited from the formal sector jobs created by legalization.”

Seeking to understand worker dynamics on a global level

Felix joins the Yale faculty this fall, after completing a yearlong fellowship at the Cowles Foundation for Economic Research. She said that a significant obstacle to understanding labor market challenges is the lack of comprehensive data, particularly on workers’ experiences and preferences – especially for informal workers, who are typically not reflected in official data. To address this gap and advance her work on outsourcing, she is launching a new initiative – the Employment Valuation Surveys – to conduct large-scale worldwide surveys of diverse sets of workers, including informal workers. 

Felix’s new initiative is supported by EGC’s Incubation Fund, which provides funding to early-stage, high-potential, time-sensitive, policy-focused research and project collaborations for developmental economics researchers at Yale. With this project, Felix aims to systematically understand the core elements of worker preferences, how they transition between different types of employment, while also analyzing the labor market effects of demand shocks (e.g., new firms entering the market). While the initiative will start by surveying Gen Z workers in Brazil, Felix hopes to collect data from around the world and make it freely available, positioning EGC as a hub of worker preference data.

The initiative is a departure from traditional academic research, but Felix is excited to create something with the potential to benefit scholars, policymakers, and the general public alike. “The incubation fund allows me to take risks and do something very creative and highly complementary to my existing research,” she said.

This story originally appeared on the Yale EGC website