Labour substitution and the scope for military outsourcing

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.