Should the Rise in Temporary Workers Scare Us?

Temporary workers have been a growing segment of the labor force since the recovery began. In 2010, 26.2% of private sector hiring can be accounted for by temporary workers alone. A front page article in the New York Times today by Motoko Rich explores this phenomenon. Rich worries that firms hiring more temporary workers is the start of a disturbing new trend. But looking a little more deeply at the data shows that this fear is overblown.

Here's why Rich is concerned about the possibility that firms will gravitate towards temporary workers going forward:

This is bad news for the nation's workers, who are already facing one of the bleakest labor markets in recent history. Temporary employees generally receive fewer benefits or none at all, and have virtually no job security. It is harder for them to save. And it is much more difficult for them to develop a career arc while hopping from boss to boss.

That's pretty grim stuff. But should we really be worried about the rise of temporary workers? In general, as hiring begins again after a recession hits, temporary workers make up a large portion of all hires. So we shouldn't really be surprised. Firms are generally nervous about whether or not a recession is truly over, and temporary workers provide companies the flexibility of cutting its staff quickly again, if necessary. They also provide cheaper labor to satisfy increasing customer demand as companies get back on their feet. Yet, Rich says that this time, it's different:

This year, 26.2 percent of all jobs added by private sector employers were temporary positions. In the comparable period after the recession of the early 1990s, only 10.9 percent of the private sector jobs added were temporary, and after the downturn earlier this decade, just 7.1 percent were temporary.

It's a little bit hard to understand where Rich's numbers are coming from here. This year began six months after the recession technically ended (in June 2009). If you look at the early 1990s recession (which ended in March 1991), a comparable period would be October 1991 through August 1992. Over that period, a whopping 41.2% of new jobs were temporary. That's far higher a portion than the 26.2% for this recession. The 2001 recession is harder to analyze, since jobs didn't begin to consistently grow for 20 months after the recession technically ended.

Moreover, temporary workers also were fired more aggressively during the recent recession than they were in the recession during the early 1990s. At that time, just 4% of jobs lost were temporary, but this time around 10.8% of firings were aimed at temporary workers. It helps to compare temporary workers to total private sector workers on a historical basis:

temp v private 2010-12.png

This chart shows a couple of important things. First, you can see that temporary workers (pink line) rose and fell at a relatively similar pace to all workers (blue line) leading up to the 2001 recession. Afterward, these two lines again began to track one another again, until the recent recession began coming on. At that time you see temporary workers take a huge dive from 2007 through mid-2009. The proportional decline is far more drastic than that of overall workers. The temporary workforce fell by 33.7%, while the overall private workforce fell by just 5.8%.

Consequently, the temporary workforce began to grow again, rapidly. That makes sense, since it had been so decimated during the recession. It's worth noting, however, that on this chart the temporary workers line lies below the private workers line as of November 2010, though during non-recessionary times it has generally been above it since 1990. In other words, temporary workers probably need to rise even more to return to equilibrium.

Tracking the portion of the private sector which consists of temporary workers reveals precisely that point. Here's another chart:

ratio temp 2010-12.png

Prior to the recession, the portion of temporary workers were pretty steady around 2.3%. Only in June 2010 did it increase back to this level, after falling as low as 1.6% in 2009. Again, this shows that we shouldn't be alarmed at the level of temporary hiring yet. If it rises past 2.5%, then perhaps there could be cause for concern.

Even looking beyond the severity of temporary worker layoffs compared to that of permanent workers, it makes theoretical sense that this labor market recovery has been dominated by temporary hires. This recession was so long and so deep, and the recovery so fragile, that firms are being extra cautious when hiring back permanent staff. Only over the past few months have economists begun lowering the probability of a double dip recession in their forecasts. In this sort of very slow recovery, firms should be expected to hire more temporary workers.

The second chart above does, however, show something else. There appears to be a broader trend that began to form in the mid-1990s. Prior to that time, the portion of temporary workers was pretty consistent around 1.3%. But something changed. At that time, the temporary worker portion of the labor market rose to above 2.0%, which would become the new standard going forward. If there's really a question to be asked regarding the rise of temporary workers, it wouldn't be about this recession and recovery, but about what happened in the mid-1990s. That's when firms began staffing 50% more workers as temporary.