Public Comments | Jobs and Unemployment

Proposed rule to privatize the federal Employment Service would likely reduce services for unemployed workers

Adele Gagliardi
Administrator, Office of Policy Development and Research
U.S. Department of Labor
200 Constitution Avenue
Washington, DC 20210

Re: Proposed Rule: Wagner-Peyser Act Staffing Flexibility, RIN 1205-AB87

Submitted electronically to

Dear Ms. Gagliardi:

The Economic Policy Institute (EPI) is a nonprofit, nonpartisan think tank created in 1986 to include the needs of low- and middle-income workers in economic policy discussions. EPI conducts research and analysis on the economic status of working America, proposes public policies that protect and improve the economic conditions of low- and middle-income workers, and assesses policies with respect to how well they further those goals.

EPI strongly opposes the Department of Labor’s (DOL) proposed Wagner-Peyser Act Staffing Flexibility rule, which would remove the longstanding, legally required, merit-based staffing rule for the Employment Service (ES) and would permit private entities to receive Wagner-Peyser Act1 funding. We strongly urge you to reject this change. In light of the potential significant impact of this rule change, we are greatly concerned about the limited 30-day comment period and strongly urge you to extend the comment period for a period of no less than 30 days.

The proposed rule would allow states to use state and local employees, contractors, other personnel, or a combination thereof, in the administration of the ES program. These rule changes could result in the privatization of multiple ES activities, including job-search assistance, job-referral and placement assistance for jobseekers, reemployment services for unemployment insurance (UI) claimants, and recruitment services for employers with job openings. Allowing states to use state and local employees, contractors, other personnel, or a combination of them, to administer ES services would also remove the requirement of merit staffing, i.e., personnel systems that are based on merit. However, the history of the Wagner-Peyser Act and the inherently governmental nature of its functions reveal the intention of the Act’s authors to require merit staffing as a foundation of the ES system. Moreover, Congress’s actions to protect merit staffing in the ES since the law’s passage over 80 years ago also support the authors’ original intent. The lack of an independent assessment showing the effectiveness of alternative, nonmerit staffing of ES programs—juxtaposed against overwhelming evidence of the success of merit staffing models—demonstrate the importance of a merit personnel system in providing employment services and maintaining accountability for UI systems nationwide. Furthermore, the notice uses broad, questionable methodology in its cost-benefit analysis.

The Wagner-Peyser Act and the inherent governmental nature of its functions require merit staffing of the Employment Service

Congress passed the 1933 Wagner-Peyser Act in response to massive unemployment experienced during the Great Depression. The Act set up local public employment offices—the Employment Service—to connect jobseekers with employment, initially in public works programs established by the New Deal. Before passage of the Wagner-Peyser Act, widespread corruption and inequities had plagued private employment offices nationwide. In passing the Act, Congress envisioned a state merit system to prevent favoritism and promote equality in the delivery of employment services. Ultimately, the 1939 Social Security Amendments established merit standards for UI and required unemployment compensation payment only through the public employment offices.

The UI and ES financing structure and the UI work test2 closely coordinated between the programs bind them together—merit staffing is a cornerstone of this connection. Title III of the Social Security Act authorized the payment of Federal Unemployment Tax Act funds to administer UI benefits through public employment offices. This integration of the financing and administration of UI and public employment offices led to housing the two activities under the same state agency and extending merit staffing requirements to ES functions. Operationally, ES staff administer the work test to ensure that claimants are able to work, available for work, and actively seeking work. These are federally required conditions of state UI eligibility. This gatekeeper function makes the role of ES staff “inherently governmental.” Today, merit-staffed ES employees in American Job Centers gather information from UI applicants and claimants, and convey the work test results to the UI program for the determination of continuing eligibility or disqualification from benefits. Removing the merit staff requirement for the ES would jeopardize the service’s future as an impartial program connecting jobseekers to UI benefits and job referrals—and could lead to a return to the widespread system abuses that led to the Wagner-Peyser Act’s passage.

In the 85-year history of the Wagner-Peyser Act, Congress has acted many times to require merit staffing in the ES. The Intergovernmental Personnel Act of 1970 required merit systems for hiring by state and local governments for federally funded programs.3 Appendix A to 5 CFR §900, Subpart F affirms the applicability of “a statutory requirement for the establishment and maintenance of personnel standards on a merit basis” in programs funded by the Wagner-Peyser Act.4 The Department does not have discretion to rescind this statutory requirement despite previous efforts to do so. A 2013 DOL guidance5 affirmed this:

States should be aware that this guidance does not change the requirement that state merit staff employees deliver labor exchange services provided under the Wagner-Peyser Act.6 Under the longstanding practice of the Department of Labor, Employment Services that are not performed by state merit staff cannot be charged to the Wagner-Peyser Act grant. Therefore, core and intensive services funded under the Wagner-Peyser Act must be performed by state merit staff.7

In response to a 2006 Bush administration proposal, Congress again used the appropriations process to prevent ES privatization. It prohibited DOL from finalizing the Bush-era rules until the Obama administration withdrew the regulations. This pattern of Congressional action to halt efforts to privatize ES reveals Congress’s critical role in supporting and maintaining ES merit staffing requirements since the program’s inception.

Selecting highly qualified, politically unbiased state government employees for the provision of employment services and performance of the UI work test remains central to reducing unemployment. For UI claimants, a referral to a job can be at least as valuable as a cash benefit. By allowing private entities to provide those services, this proposal could introduce a profit motive that might interfere with the job referral process. For example, contractors evaluated and paid based on the total number of job placements might have little incentive to consider whether they are referring candidates of diverse nationalities and races or simply referring the most employable workers. Outsourcing the ES’s labor exchange function carries risks for the longstanding ES commitment to serving disadvantaged and low-income workers who typically require greater levels of service but have historically been underserved.

Previous efforts to privatize the delivery of social service programs that required merit-based personnel standards produced disastrous results. Failed privatization schemes in Indiana and Texas blocked Supplemental Nutrition Assistance Program (SNAP) benefits for thousands of people and resulted in huge cost overruns.8 Government should represent the uninformed, unrepresented UI claimant. Without high-caliber and merit-based ES employees, government cannot guarantee that people receive the services that the Wagner-Peyser Act requires.

EPI believes the rule could lead to potential damaging effects on the economic well-being of low-income workers. Many low-income workers rely on ES and UI services to assist them in securing a job that fits their needs and skill set. By removing the merit staffing requirement and allowing private entities to receive Wagner-Peyser Act funding, DOL is at risk of shifting the ES away from being a worker-focused program that seeks to place individuals in positions they are qualified for toward a profit-motivated service focused on the number of job referrals filled. This could have negative effects on both jobseekers and potential employers as it could create greater employment turnover and lack of economic stability.

Further, such changes stand to disproportionately negatively impact black and Hispanic workers whose unemployment rates remain high relative to white workers in almost every state. In the latest quarterly report on state unemployment rates by race and ethnicity, black workers had the highest unemployment rate nationally, at 6.7 percent, followed by Hispanic workers at 4.7 percent and white workers at 3.1 percent. EPI analysis of the report showed that the black unemployment rate was higher than the white unemployment in all of the states for which data are available and, in some cases, twice as high in 16 states and the District of Columbia.9 Ensuring that the ES provides services to unemployed workers on an unbiased basis is essential to eliminating longstanding racial disparities in employment outcomes. Moreover, previous ES privatization in states has not proven effective in improving quality jobs-placement of workers.

Privatization has not worked in demonstration states with alternative staffing models

The proposal cites pilot projects in Massachusetts, Michigan, and Colorado to support the claim of the effectiveness of ES privatization. However, findings from a 2004 study10 contradict the Department’s assertion. Compared with three states with merit-based staffing (North Carolina, Oregon, and Washington), contracting out ES functions to private entities resulted in an underperformance in referrals, placements, job openings, and registrations. The study concluded that the merit-based comparison states (“traditional public labor exchanges”) were highly cost-effective. In fact, the benefits exceeded costs by as much as two to three times in merit-based states, while benefits were considerably smaller in the pilot-project states.11 These demonstrations have continued without further evaluation. Moreover, a 2012 study of Nevada’s Reemployment Eligibility and Assessment program (previously titled the Reemployment and Eligibility Assessment program) revealed that requiring merit-based staff to conduct all program components improved outcomes—connecting claimants to jobs more quickly and, as a result, lowering total benefit payouts.12

Referring to the demonstration states, the proposal cites potential wage savings in administrative costs as the primary rationale for the rule change. However, the analysis leaves out any discussion of program effectiveness and accountability. The only existing evaluation (the 2004 study described above) shows that privatization is less cost-effective than employing merit-based personnel.13 Further, the proposed rule fails to describe the contracting process and leaves the ES open to potential conflicts of interest. For example, the proposal doesn’t describe whether Local Workforce Development Boards will make contracting decisions and, if so, whether they will be prohibited from bidding on the work.

DOL uses broad, questionable methodology to determine an estimated wage savings of $28 billion

The proposed rule’s claims of wage savings realized through privatization are flawed. Though all 50 states, the District of Columbia, Puerto Rico, Guam, and the Virgin Islands receive Wagner-Peyser Act funding, the methodology includes only eight states in its analysis. In these eight states, which include the demonstration states (Colorado, Michigan, and Massachusetts), DOL’s analysis estimates much higher public-sector wages and compensation compared with the private sector. However, we at EPI find that state and local government employees earn less than similar private-sector workers.14 DOL’s analysis also doesn’t compare similar workers in both sectors. For example, it compares low-paid, nonunionized private-sector workers (e.g., food service workers) with higher-paid administrative support government employees. Furthermore, the methodology relies on Occupational Employment Statistics (OES) data that, according to the Bureau of Labor Statistics, are inappropriate for this comparison:

Can OES data be used to compare private and government pay for similar work? Occupational wages in the different ownership groups (the private sector, and state, local, and federal governments) are influenced by many factors that the OES measures cannot take into account. Thus, while one can obtain OES data that compare estimates of mean and median wages paid in a wide range of detailed occupations across ownership groups, those comparisons do not explain why they might be different. . . . OES data are not designed for use in comparing federal and private sector pay because the OES data do not contain information about pay according to the level of work performed.15

The proposal makes other questionable underlying assumptions. First, it assumes that the administrative costs of contracting out services “would be small.”16 However, recent research disputes this claim. The Government Finance Officers Association uses a standard assumption of between 10 and 20 percent of a contractor’s bid for contract monitoring and administration costs.17 A separate Rutgers study found monitoring and compliance expenditures in excess of 20 percent of project costs in New Jersey.18 In addition, in comparing salaries of public- and private-sector workers, the analysis arbitrarily doubles public wage rates to account for fringe benefits and overhead without providing details of what “fringe benefits” and “overhead” include. Without more information on fringe benefits and overhead, it would be impossible to evaluate wage and compensation costs.


The Economic Policy Institute urges the DOL to withdraw this proposed regulation. The proposal would likely reduce services for unemployed workers. Privatizing the ES serves only one constituency—corporate interests that stand to profit from gaming a system designed to ensure that unemployed workers receive employment search assistance. We know what that system looks like because it was the corruption of the private system that led to passing the Wagner-Peyser Act and establishing the merit-staffed Employment Service in the first place. Privatization does not produce greater efficiencies or cost-savings. Instead, it creates a situation in which unemployed workers may receive biased job counseling and placement services and it reduces the job quality of professionals in the ES. The proposed rule threatens the administration of our nation’s UI and ES systems and should be withdrawn.


1. The Wagner-Peyser Act of 1933, as amended by the Workforce Investment Act of 1998 and the Workforce Innovation and Opportunity Act of 2014, U.S. Department of Labor Employment & Training Administration,

2. Ibid. See Sec. 7(a)(3)(F) of the Wagner-Peyser Act.

3. SL 60001.675 Intergovernmental Personnel Act of 1970 at

4. Standards for a Merit System of Personnel Administration 5 C.F.R. Appendix A to Subpart F of Part 900.

5. Jane Oates, Assistant Secretary, “Advisory: Training and Employment Guidance Letter No. 11-12,” U.S. Department of Labor Employment and Training Administration, addressed to State Workforce Agencies, State Workforce Administrators, State Workforce Liaisons, State And Local Workforce Investment Board Directors, Comprehensive And Affiliate American Job Center Directors, and American Job Centers, January 3, 2013,

6. See 20 CFR 652.215 for applicable regulatory text.

7. Three states have received an exemption from the Employment Service merit staffing requirements under the Wagner-Peyser Act. Those three states are Colorado, Massachusetts, and Michigan.

8. Matea Gold, Melanie Mason, and Tom Hamburger, “Indiana’s Bumpy Road to Privatization,” Los Angeles Times, June 24, 2011, Updating and Outsourcing Enrollment in Public Benefits: The Texas Experience, Center for Public Policy Priorities, November 2006,

9. Valerie Wilson, “Black–White Unemployment Gaps Hold Steady or Widen,” Economic Indicators: State Unemployment by Race and Ethnicity, Economic Policy Institute, May 2019,

10. Louis Jacobson, Ian Petta, Amy Shimshak, and Regina Yudd, Evaluation of Labor Exchange Services in a One-Stop Delivery System Environment, WESTAT, prepared for U.S. Department of Labor Employment and Training Occasional Paper 2004-09, February 2004, The Bush administration released the paper to the public in 2008.

11. Ibid.

12. Marios Michaelides, Eileen Poe-Yamagata, Jacob Benus, and Dharmendra Tirumalasetti, Impact of the Reemployment And Eligibility Assessment (REA) Initiative In Nevada, Impaq International, January 2012, The study showed a decrease in weeks of duration that was greater than in any other state. The state accomplished this by requiring merit ES staff to conduct the entire work test. In other states, nonmerit Workforce Innovation Opportunity Act (previously Workforce Investment Act) staff administered some of these services. For additional evidence of REA’s success, see Stephen A. Wandner, Solving the Reemployment Puzzle: From Research to Policy, W.E. Upjohn Institute for Employment Research, 2010,

13. Louis Jacobson, Ian Petta, Amy Shimshak, and Regina Yudd, Evaluation of Labor Exchange Services in a One-Stop Delivery System Environment, WESTAT, prepared for U.S. Department of Labor Employment and Training Occasional Paper 2004-09, February 2004, The Bush administration released the paper to the public in 2008.

14. Jeffrey Keefe, Public-sector Workers are Paid Less than Their Private-sector Counterparts—and the Penalty is Larger in Right-to-work States, Economic Snapshot, Economic Policy Institute, January 14, 2016,

15. “Frequently Asked Questions,” Occupational Employment Statistics, Bureau of Labor Statistics, accessed July 17, 2019,

16. See footnote 16 in the notice,

17. R. Gregory Michel, Cost Analysis and Activity-Based Costing for Government, Chicago: Government Finance Officers Association, 2004.

18. Janice Fine, Patrice Mareschal, David Hersh, and Kirk Leach, Overlooking Oversight: A Lack of Oversight in the Garden Sate is Placing New Jersey Residents and Assets at Risk, Rutgers University, Department of Labor Studies and Employment Relations, March 2014,