A study examined the issue of contracting out traditional government services and its effect on government employees. It found that local governments contract out for two principal reasons: to cut the cost of providing services and to employ specialized skills and resources unavailable within the government. Findings from a review of the privatization literature were that: (1) only about 5-10 percent of public employees affected by contracting out were laid off; (2) public assistance payments to laid-off workers were very low; (3) private contractors paid lower wages and offered lower fringe benefits; (4) contracting out was not inherently harmful to minorities or women; and (5) contracting may have a slightly positive impact on the number of available jobs. Interviews with local officials from 17 cities and counties generally confirmed these findings and indicated that very few workers were laid off as a result of contracting out and few cities had formal contracting out employment policies. Policy recommendations were as follows: (1) target new and expanded services for contracting out; (2) establish a "no layoff" policy; (3) reduce the government work force through attrition; (4) encourage government employees to form private companies to provide government services; (5) allow the city agency to compete in the bidding process; and (6) develop policies for aiding displaced public employees. (66 references) (YLB)