Government contracts boost profits while worker wages barely move
Firms that win public contracts see higher revenue and profits, while average worker wages barely change, new research suggests. The findings highlight how competition in public procurement can shape both the efficiency of government spending and income inequality.
Governments spend large sums every year buying goods and services from private companies. How those contracts are awarded can have consequences that extend beyond getting good value for taxpayers.
A new working paper co-authored by House of Sustainable Society affiliate Sampreet Singh Goraya, Assistant Professor at the Department of Economics at the Stockholm School of Economics, examines what happens inside companies when they win public procurement contracts.
Using data from Croatia between 2013 and 2019, the study finds that firms become more profitable after winning a contract, while average wages barely change.
In the year of a firm’s first observed contract win, its revenue increased substantially while revenue per worker rose by 6 percent, but average wages remained essentially unchanged.
As a result, workers received a smaller share of the income generated by the firm. Economists call this the “labor share.” It measures how much of the income created by a business goes to its workers rather than to profits and other returns.
“Winning a government contract can clearly benefit a firm, but our results suggest that the benefits are not necessarily shared equally. Revenues and profits rise, while workers’ wages barely move,” says Sampreet Singh Goraya. “This means employees receive a smaller share of the income generated by the firm.”
Less competition, larger gains for firms
The effects were strongest when a company was the only bidder for a public contract. These single-bid contracts made up 35 percent of the total value of contracts studied.
Companies that won single-bid contracts saw their profits increase more than companies that faced competition from other bidders. The government also tended to pay more: single-bid contracts were awarded at prices 6.4 percent higher, relative to the public buyer’s own estimate, than comparable contracts with several bidders.
This suggests that competition matters not only for how much governments pay but also for who benefits from public spending. When there is less competition, a larger share of the financial gain may go to company owners, while workers see little change in their wages.
“What stands out is the role of competition. When several firms compete for a contract, there is less room for the winner to increase its profit margins,” says Goraya. “Encouraging genuine competition in public procurement could therefore help governments get better value while also limiting how much public spending contributes to unequal income distribution.”
Public procurement can shape economic inequality
The findings connect public procurement to a broader question of economic sustainability: how economic gains are distributed across society.
Public procurement is often discussed in terms of price, efficiency, and responsible use of taxpayers’ money. The study suggests that competition also matters for income distribution. If government contracts increase company profits without comparable increases in wages, public demand can contribute to a shift in income away from workers.
“That makes competition in procurement an issue of economic inequality,” says Goraya.
The study also finds a link between single-bid contracts and connections to public procurement bodies. Firms whose owners or managers are current, former, or future senior officials at such bodies were more likely to receive contracts with only one bidder.
The results point to competition and transparency in procurement as more than questions of public-sector efficiency. They may also matter for inclusive and sustainable economic development. Procurement rules that encourage genuine competition could affect both what governments pay and how the economic benefits of public spending are shared.
Research details
“Pricing Government Demand: Competition, Markups, and the Labour Share” published in the HoSS Working Paper Series
Authors:
- Sampreet Singh Goraya, Assistant Professor at the Department of Economics at the Stockholm School of Economics and affiliated with the Development and Environmental Economics Platform at the House of Sustainable Society.
- Stjepan Srhoj, Associate Professor of Economics at the Faculty of Economics, Business and Tourism at the University of Split.
- Jurica Zrnc, Director of the Monetary Policy Department at the Croatian National Bank.
