Academic journal article Economic Perspectives

Temporary Help Services and the Volatility of Industry Output

Academic journal article Economic Perspectives

Temporary Help Services and the Volatility of Industry Output

Article excerpt

Introduction and summary

Many firms today are changing their organizational structures by adopting more flexible staffing arrangements. Such arrangements frequently include hiring temporary workers, on-call staff, and private contractors. Recent surveys reveal that the use of flexible staffing arrangements and, in particular, the use of temporary workers in the U.S. economy has become more widespread.

According to a 1996 Upjohn survey of private employers, as many as 78 percent of establishments used at least one type of flexible staffing arrangements in 1996; 46 percent of establishments employed temporary workers (Houseman, 2001a). The Bureau of Labor Statistics (BLS) data on employment reveal that the temporary help service (THS) industry, which supplies temporary workers, grew by more than 700 percent between 1982 and 2000--THS employment increased from approximately 417,000 to 3,489,600 in that period. The dramatic increase in the use of temporary workers has generated a vigorous debate among economists and policymakers about the costs and benefits of flexible staffing arrangements.

One of the most frequently cited reasons for the adoption of flexible staffing arrangements is that such arrangements allow firms to accommodate unexpected increases and decreases in business activity. By using flexible labor, firms, especially in volatile industries, can meet a surge in demand more efficiently; and if business activity experiences a downturn, firms can reduce their flexible work force without making costly adjustments to their permanent employment levels.

However, very few studies offer direct empirical evidence to support this view. The relationship between the rise and fall in a firm's output and its use of flexible staffing arrangements is not as straightforward as it might seem at first. On one hand, the volatility of output may induce firms to expand the use of flexible staffing arrangements, increasing the aggregate number of flexible workers. But on the other hand, if the demand for flexible labor fluctuates a great deal in response to firms' hiring and laying-off patterns, subcontractors and agencies supplying temporary help might find it difficult to continue providing such services to the market, potentially decreasing the use of flexible labor.

In this article, we conduct a closer examination of the relationship between the fluctuations of output and labor supplied by THS agencies, one of the commonly used forms of flexible staffing arrangements. Using state-level data, we analyze the shares of THS employment in relation to the output volatility of other sectors (non-THS industries) across the U.S. from 1977 to 1997. In order to capture the effect of volatility, we construct an index that measures the degree of fluctuation of industry output in each state. Furthermore, we decompose the volatility index into two components: one that measures the volatility associated with each individual industry; and a second component that measures the co-movement of output fluctuations for different industries in the same state. We find evidence that there is a positive association between the level of output volatility and the share of temporary service employment across different states. This result suggests that industries that experience greater fluctuations i n output use more THS labor than industries that are relatively stable. Furthermore, we find that the THS shares are lower in the states in which the fluctuations of output are highly correlated among industries, suggesting that the flexibility of labor markets is lower in areas with a high degree of co-movement of output fluctuations across different industries. One possible interpretation is that THS agencies may find it difficult and costly to supply temporary workers to the labor market in areas with a high degree of industry co-movement, where many client firms simultaneously reduce or increase their usage of temporary workers. …

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