Contracting transit operations
Transit agencies may contract for a portion or all of their operations needs. Smaller, newer transit agencies without historical relationships with unionized labor are more likely to contract all of their service. Larger, older agencies with standing relationships and long histories with unionized labor typically contract only a portion of their labor, if any at all. Reducing the number of union contracts would be politically difficult. 
Views on contracted labor
Three general perceptions about how contracted labor reduces operating costs dominate contemporary views. First, contracting labor capitalizes on any difference in the cost of non-union labor in the private sector. Typically, non-union labor is believed to be less costly than unionized labor. Second, contracting with the private sector introduces competition into the labor market, creating an incentive for labor unions to reduce wages in their contracts with the public sector. Third, transit agencies contract out inefficient service in order to maintain efficient operations under their direct control.  This may include utilizing more flexible non-union labor such as in split shifts. Split shifts are shifts in which a worker logs two four-hour shifts in the same day rather than a continuous shift of eight hours or more. This model fits well with peak hour travel in which operators are needed in the morning and afternoon but not necessarily in the middle of the day. Split shifts avoid overtime pay.
Contracted service is also seen as flexible over the long-term. Transit agencies view contracted labor as easier to initiate and terminate than directly hired labor. Rather than directly hiring workers for experimental routes, transit agencies may benefit from reduced political risk by contracting for service until the service is deemed to be permanent. Along these same lines, contracted labor is viewed as faster to initiate service than directly contracted labor. For new service routes, transit agencies may hire contracted operators in order to expedite start of service. 
Efficiency achieved through contracting
Despite these commonly held views, contracted service yields only moderate cost savings. In a study of 400 transit agencies spanning a 10 year period from 1992 to 2002, partially contracted service yielded a 7.8% cost savings while contracting all service yielded only a 5.5% savings. Research has also shown a strong self selection bias to be present among transit agencies. If an agency can achieve cost savings through contracting either a part or all of its service, it will do so. Other agencies efficiently delivering their own directly provided service are much less likely to contract service. Thus, transit agencies cannot necessarily look to other agencies for guidance on the choice of contracting.
Effect of contracting on labor
Of the savings achieved through privatization of transit operations, the vast majority appear to come at the expense of labor rather than from an increase in productivity. Contracted workers earn 38% less per hour and 34% less per year than their publicly employed counterparts. Benefits were the most severely differentiated form of compensation with contracted workers receiving 58% less in benefits than public employees. 
Contracted transit operators also work more overtime than publicly employed transit workers.
Additional effects from contracting
Contracting labor has been associated with a decline in service quality. Contracted transit service has been found to have up to 70% more collisions and 34% more mechanical breakdowns than through comparable publicly provided service. 
- Iseki, Hiroyuki, Amy Ford and Rachel J. Factor (2006), “Contracting Practice in Fixed-Route Transit Service: Case Studies in California”, Transportation Research Record, 1927: 82-91.
- Taylor, Brian, Karen Frick and Martin Wachs (2008), "Contracting for Public Transit Services in the US", Privatisation and Regulation of Urban Transit Systems, Transport Research Centre Round Table 141: 47-62.
- Iseki, Hiroyuki (2004), “Does Contracting Matter? The Determinants of Contracting and Contracting’s Effects on Cost Efficiency in US Fixed-Route Bus Transit Service”, University of California, Los Angeles, unpublished dissertation.
- Kim, Songju (2005), “The Effects of Fixed-Route Transit Service Contracting on Labour”, University of California, Berkeley, unpublished dissertation.
- Nicosia, Nancy (2002), “Essays on Competitive Contracting: An Application to the Mass Transit Industry”, University of California, Berkeley, unpublished dissertation.
Frick, Karen Trapenberg, Brian Taylor, and Martin Wachs. "Contracting for Public Transit Services: Evaluating the Tradeoffs." 2006.
- This synthesis offers historical background on the practice of contracting for public transit services, as well as guidelines for transit agencies to make contracting successful. These guidelines also explicitly outline situations in which contracting may not work. The synthesis is careful to point out that contracting has had mixed results and cites a variety of studies on the practice.