EconSouth (Second Quarter 2004)
Labor Market Lessons
From Georgia’s Temp Workers
Not that long ago, people studying the U.S. labor market were concerned about the number of permanent jobs being filled by temporary workers. Today, however, much of that angst has been overshadowed by the headlines about U.S. jobs moving overseas. Though the debate has shifted away from temporary workers, temporary employment continues to play a vital role in the functioning of the labor market and in foretelling its movements.
Interest in the temporary workforce—which represents a relatively small sector of the labor market—began to rise in the mid-1980s as the share of temporary workers in the labor force began to increase. In 1985, workers in the temporary help services industry (the U.S. Census Bureau classification for temporary workers) accounted for less than 1 percent of overall nonagricultural, private employment in the United States. By 2003, employment in this sector had grown to 2.1 percent of total U.S. employment. This doubling of temporary workers’ employment share is significant and is higher than growth in other areas, including computer system design services and business support services, two areas typically viewed as having grown significantly recently.
An article in an earlier issue of EconSouth (“Temps Have a Permanent Place in the Workforce,” Third Quarter 2002) documented the use of and growth in a broader classification of temp workers throughout the states that make up the Sixth Federal Reserve District. The article discussed how businesses benefit from the flexibility afforded them by using temp workers. Hiring temps allows firms to absorb cyclical fluctuations in demand without incurring the costs of hiring and firing permanent workers or providing health benefits. Many businesses also use temp agencies to screen potential permanent workers; if a temp works out, he or she is then hired into a permanent position.
As these highly publicized advantages of using temp workers have resulted in the phenomenal growth experienced by this segment of the labor market, employment in temporary help services has also gained a reputation as a leading indicator of total employment (see chart 1). Coming out of the 1990–91 recession, the upturn in temporary help services employment led employment in all other sectors by eight months, and the downturn into the 2001 recession saw temporary help services leading the rest of the labor market by 11 months. It is too early to tell whether the slight upswing in the rest of employment that began in August 2003 will be sustained. If it is sustained, then temporary help services employment led the overall employment upswing by four months. The vacillations in temporary help services employment between January 2002 and April 2003 likely reflect firms’ uncertainty regarding the recovery.
|Those who put a positive spin on the temporary help services phenomenon point out that using temporary workers results in a more flexible, adaptable labor market.|
What is clear from chart 1 is that temporary workers, as a group, play an important role in the overall labor market. Unique data on individual workers in the temporary help services sector make it possible to investigate the instability of the sector through the business cycle, temp workers’ experience during the most recent recession, and temp workers’ earnings compared to those of workers in other sectors. These factors help define the experience of individual workers employed in temporary help services, which may be very different from those of workers in other sectors. Understanding the experiences of these individuals can help businesses and policymakers better grasp the role such workers play in the functioning of the labor market.
A unique look at individual workers in Georgia
A quarterly report that firms are required to file with their state’s department of labor details the number of workers the firm employs each quarter in that state as well as how much each worker is paid that quarter. These nonpublic data, made available to the author on a restricted basis, provide a unique opportunity to look at the experiences of individual workers rather than just workers in the aggregate. The data also furnish details about employment gains and losses in a specific industry. In other words, the data make it possible to follow workers over time to see how temp workers fared during the recession. Did temps spend more time unemployed? Did they work for more employers? Did they experience greater earnings losses or gains? Data from the Georgia Department of Labor provide answers to these questions for workers in Georgia.
In addition, the quarterly data also show how the temporary help services industry responds to changes in demand for its workers. Is job creation in temporary help services dominated by new firms opening or by existing firms expanding? Is job destruction in temporary help services dominated by firms closing or by firms reducing their employment numbers? While only the experiences of Georgia’s temp workers are examined here, the data provide details about this sector and its workers that have never before been analyzed.
Temporary help services are volatile
The level of employment in each quarter is determined by a number of factors. Jobs are lost as firms shut down or lay off workers, and jobs are created as new firms open or existing firms hire more workers. The sum of this job destruction and creation yields the changes in total employment shown in table 1. The data gathered by the Georgia Department of Labor can be used to break down the total employment change from one quarter to the next into each of its components.
Table 1 confirms that the temporary help services industry is much more volatile than the rest of the labor market. The average employment growth in temporary help services during the 1990s’ expansion was 3.2 percent per quarter, much larger than the average 0.9 percent growth in the remainder of the labor market. In addition, the job loss in temporary help services during the 2001 recession exceeded (in percentage terms) losses in the rest of the market. The larger percentages of net employment contributed by all activities (shutdowns, contractions, openings, and expansions) also point to greater churning in the temporary help services industry. In other words, a smaller percentage of workers in the temporary help services industry stay with their employer from one quarter to the next compared with workers in all other industries.
Dissecting the sources of job destruction and creation reveals that the temporary help services industry relies much more on extreme adjustments of temp agency firms shutting down and opening during an expansion than the rest of the labor market does. Indeed, temp agency firms shutting down and opening up accounted for an average of 21 percent of temporary help services employment during the expansion compared with only 8.9 percent of employment in the rest of the labor market. Furthermore, there was more opening and closing activity in temporary help services during the expansion than during the recession, but the rest of the labor market experienced more opening and closing activity during the recession. This pattern implies that the demand for temporary workers continues to grow through expansionary times, with many entrepreneurs starting up temporary employment businesses and many others failing.
Suffering through the recession
Workers in an industry that is particularly volatile can have a much different labor market experience across the business cycle than workers in a less volatile industry. To examine the potential impact of the volatility in the temporary help services industry on its workers through a recession, table 2 compares a number of different characteristics of workers in Georgia in temporary help services and other sectors of the labor market before and after the recession.
The volatility of temporary help services is apparent in the experience of its workers. In Georgia, only 64 percent of the workers employed in temporary help services in 2000Q1 were employed in 2002Q4, after the recession. In comparison, about 80 percent of Georgia’s workers in manufacturing and other services and about 74 percent of workers in retail trade were still employed after the recession. In addition, temporary help services workers spent an average of 2.3 quarters unemployed during the recession, more than double the time spent unemployed by manufacturing and other service workers and one and a half times the period spent unemployed by workers in retail trade.
Among Georgia workers who were employed after the recession, only 25 percent of temporary help services workers were employed by the same firm; this figure compares with 50–70 percent of workers in other sectors. One reason the temporary help services figure is so low could be that some temporary help services workers transitioned into permanent positions at the firms to which the temp agencies were supplying their labor. Among those workers who were employed by a different employer in 2002Q4 than in 2000Q1, a fairly sizable fraction (15 percent) were still employed in the temporary help services sector. However, this fraction is smaller than the percentage of workers in other sectors who changed employers but stayed in the same narrowly defined industry. This figure reinforces the possibility that temporary help services workers who were still employed postrecession transitioned out of temporary help services by 2002Q4.
Table 2 also shows that while the earnings of temporary services workers were relatively low, they were higher on average than those for workers in retail trade. In addition, temporary workers who remained employed through the recession enjoyed an average 2.2 percent increase in real earnings. While this increase is considerably better than the average 2.2 percent decline in manufacturing workers’ real earnings, it is considerably smaller than the real earnings gains by retail trade workers, at 6.9 percent, and other service workers, at 5.2 percent.
Temps fare better with new firms
The unique nature of the temporary help services industry is further illustrated in chart 2, which shows the percent change in earnings over the course of the recession experienced by workers who stayed employed by the same firm and by workers who changed employers. For each industry except temporary help services, workers fared better through the recession if they were able to remain employed by the same firm. Temporary workers, however, actually experienced earnings losses if they remained with the same firm. The 3.1 percent increase experienced by temp workers who changed employers may be a further indication that at least some temp workers were able to parlay their temporary positions into permanent ones, even during the recession.
Employment quality is important
Some have argued that policymakers are overly concerned by the growth in temporary help services employment—that a job is a job and that the United States should be just as happy about employment growth in temporary help services as in any other area of the labor market. Those who put this positive spin on the temporary help services phenomenon point out that the use of temporary workers results in a more flexible labor market that is able to more quickly and accurately respond to changes in demand for final products, in turn helping to reduce volatility in the overall economy.
Not all jobs are created equal, however. There are important differences in the labor market experience of temporary help services workers compared with workers in other sectors. For many workers, temporary employment provides an entree into a more permanent position, but, as seen here, that path may prove to be quite rocky.
This article was written by Julie Hotchkiss, an economist and policy adviser in the regional group of the Atlanta Fed’s research department and an associate professor of economics in the Andrew Young School of Policy Studies at Georgia State University.
What does recent temp hiring look like, and what does it mean for employment growth in other sectors? Reports from those who respond to demands for temp workers indicate that demand in the first quarter of 2004 started out stronger than expected.
The staffing supervisor at one Florida temp agency reported an amazing first quarter in 2004. Demand for his temps is up 35 percent during the first quarter. That jump comes on the heels of a 22 percent increase in demand during the fourth quarter of 2003. This supervisor also reported seeing growth in the high-end market (employees making $75,000 a year and up), where clients often use temp agencies to screen skilled permanent workers.
The president of a staffing company in Georgia is also reporting an uptick in clients using his services to find permanent workers. In what is typically his slowest quarter, this company president saw a 30 percent increase in business during the first quarter of 2004 in Atlanta and even better business in smaller towns near Atlanta, demonstrating that the growth is not limited to metropolitan areas.
If the experience reported by contacts in Georgia and Florida is widespread, this strong growth in temp hiring bodes well for permanent, persistent job growth on a broad basis.