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Privatization of state government services is commonplace, but our understanding of its effects is limited by data availability. We study the relationship between American state government contracting and public sector wages. Governments have used public sector employment to support a variety of goals, including social equity and economic development, but privatization, as a new public management (NPM) reform, may shift the focus. Our empirical analysis shows that state privatization of service delivery is associated with decreases in the public sector wage premium, but that these effects are not driven by gender, race, or low‐levels of educational attainment. The fidelity of the implementation to NPM values conditions these effects. We also find that contracting service delivery is associated with a lower public sector wage premium for middle‐class workers. [ABSTRACT FROM AUTHOR]