TEMPORARY EMPLOYMENT AND THE SPOT MARKETMODEL

SUGGESTIONS FROM A PRELIMINARY STUDY

byHiroshi Ono

Working Paper No. 116January 2000

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Temporary Employment and the Spot Market Model

Suggestions from a Preliminary Study

(Revised version of paper originally presented at the Work, Employment & Society

Conference, University of Cambridge, September 1998)

ABSTRACT

In recent years, growth rate of temporary employment has far surpassed the growth rate ofaggregate non-farm employment. Market uncertainty, such as the rapid pace of technological change, hasgiven rise to a practice where employers hesitate to hire workers into their core workforce, and becomeincreasingly more reliant on contingent labour. The result is a just-in-time practice of human labour inwhich employers purchase skills on an as-needed basis. While previous studies have focused on eitherthe supply- or the demand-side factors behind temporary employment growth, this paper focuses on theactual temp-employer matching process which take place within temporary staffing firms. Based oninterview results from managers and executives of the temporary staffing firms in the US, I argue that theexplosive growth of temporary employment can be attributed to its spot market features which allowemployers to adjust freely to market changes while minimizing transaction costs.

Keywords: just-in-time production, spot-market model, technological change, temporary employment,transaction costs

JEL Classification: J21, J23, J31, J41

1 Introduction

The movement towards contingent employment practices originally began to

attract attention when the book The Contingent Economy was published in 1989 by

Richard Belous of the National Planning Agency. According to the Bureau of Labour

Statistics (BLS), contingent workers are defined as “those individuals who do not

perceive themselves as having an explicit or implicit contract for ongoing employment”

and include part-time work, self-employment, employment in the business services

industry, as well as “any work arrangement that might be considered to differ from the

commonly perceived norm of a full-time wage and salary job.” 1 Although grossly

overstated, Belous’s estimates that contingent workers account for one third of all

workers caught the attention of many, and the trend has since been monitored closely by

policy makers, the media and academics.

Although the distinction between what constitutes contingent workers and what

does not is open to considerable debate, researchers have proposed several useful ways

concerning the extent to which contingent employment deviates from standard forms of

employment. In particular, Kalleberg, et al define standard employment as being

characterized by “the exchange of a worker’s labour for monetary compensation from

an employer with work done on a fixed schedule – usually full-time – at the employer’s

place of business, under the employer’s control, and with the mutual expectation of

continued employment” (2000: 258), and further construct a scale of standard versus

1 Bureau of Labour Statistics. “Contingent and Alternative Employment Arrangements.” (Press release,February 1997).

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non-standard (or “bad”) jobs, in which they categorize jobs according to the number of

“bad” characteristics inherent in the job. Using the 1995 Current Population Survey,

they estimate the number of “bad jobs” as those with low pay, and lack of health

insurance and pension benefits and find that one out of seven American jobs is bad on

these three dimensions.

Another notable dimension of contingent employment concerns flexibility. If

we were to categorize jobs across a continuum of flexibility, then on one extreme would

be the standard or the full-time ‘permanent’ jobs. These jobs are typically found in the

core of the internal labour market and are characterized by extensive training, internal

promotions and employment security. On the other end of the continuum are the

flexible jobs. In its extreme form, flexible job assignments may be those which last

only a matter of few hours. Workers in such flexible job arrangements have little or no

employment security as they take on assignments from one employer to the next. The

continuum of job flexibility is hence a continuum which characterizes the duration of

the employment relation, from long-term ‘permanent’ jobs to short-term jobs that last

less than a day.

This paper focuses on the most flexible form of employment known as

temporary employment. Workers in this category are employed by temporary staffing

firms who dispatch workers to client firms on an as-needed basis. Given its highly

flexible nature, temporary employment has grown at a pace which far surpasses the

growth of aggregate non-farm employment. Although supply-side factors such as the

desire for flexible employment among workers have received some attention, temporary

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employment growth can be attributed mainly to the benefits it bestows on employers.

In fact, the Kalleberg study finds that temporary workers belong to the “baddest” of the

“bad job” category, mainly because employers view temporary workers as a cost-

minimizing tactic and have no vested interest in investing in them (see also Houseman

1998).

While previous studies have examined supply- or demand-side factors behind

the growth of temporary employment, this paper focuses on the market intermediary –

the temporary staffing firm. Based on interviews with managers and executives of

temporary staffing firms, I highlight some of the principle features of the temp-

employer matching process, or the process in which temporary workers are matched to

jobs. Given the brokerage role between the supply and demand for human labour, the

matching transactions which take place within temporary staffing firms mirror the

selling and buying of commodities. Moreover, with the advancement of information

and database technology, the matching of temps to jobs is headed in the direction of

instantaneous transactions, features which closely resemble the spot-market model.

While the paper focuses primarily on micro-level transactions, the impact of temporary

employment growth has far reaching implications at the macro-economic level. The

paper closes by exploring the relationship between temporary employment,

unemployment and wage changes, in the context of the recent economic expansion in

the US.

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1.1 Why study temporary workers?

BLS categorizes temporary workers as “workers who are paid by a temporary

help agency whether or not their job was temporary.”2 According to the BLS

classification, contingent workers accounted for 1.9 to 4.4 percent of all employment in

February 1997; temporary workers accounted for 1.0 percent. Using a different

measurement procedure, the National Association of Temporary Staffing Services

(NATSS) reports the proportion to be 2 percent at the end of the fourth quarter of 1998.

These numbers suggest that temporary workers make up a very small proportion of the

civilian labour force.

So why study temporary workers? There are several reasons. First, change in

temporary employment is widely believed to be a leading indicator of employment

conditions. In a report issued by the Federal Reserve, Segal & Sullivan (1995) find that

temporary employment has consistently led aggregate employment during recent

business cycles and write, “the predictive power of this industry for the aggregate

economy is particularly interesting in view of its small size.” Changes in temporary

employment have become crucial indicators for policymakers in predicting economic

expansion.

Second, the temporary workforce is growing at a rate which far exceeds the

growth of aggregate employment. According to NATSS estimates, the number of

temporary workers grew from 184,000 (or 0.26 percent of total employment) in 1970 to

2 BLS, ibid. In the Current Population Survey, BLS categorizes temporary workers as (1) those who saidtheir job was temporary and responded affirmatively to the question, “Are you paid by a temporary helpagency?” and (2) workers who said their job was not temporary but answered affirmatively to the

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over 2.8 million3 in 1998. From 1992 to 1995, temporary employment grew at an

annual rate of 17 percent, from 1995 to 1998 at an annual rate of 9 percent. The growth

in this sector of the labour force far surpasses the 2 percent per annum growth rate of

aggregate non-farm employment.

Third, while temporary employment maybe a small proportion of labour

supply, their impact on labour demand has been incredible, if not irreversible.

Temporary workers are in great demand by firms who take advantage of the highly

flexible nature of the temporary employment arrangement. Some 90 percent of US

firms use temporary workers (Abraham 1990), thereby suggesting somewhat ironically

that the use of temporary employment is becoming a permanent feature of the US

business environment (Larson 1996; Nollen 1996).

And fourth, insofar as temporary workers represent flexible employment

trends, a focus study should advance our understanding of why the labour market is

headed towards flexibility. Although the proportion of workers categorized as

temporary is very small, a looser interpretation of the terms “temporary” or

“contingent” would include a wider range of workers and occupations4. For example,

outsourcing practices which have become increasingly popular in recent years5 may

question, “Even though you told me your job was not temporary, are you paid by a temporary agency?”3 Numbers indicate average daily employment.4 Dennard (1996) suggests that a broad definition of contingent employees could include the following:(1) self-employed individuals; (2) individuals with a “short-term” employment contract; (3) part-timeemployees; (4) temporary employees; (5) casual employees; (6) leased employees; (7) independentcontractors; (8) on-call employees; (9) seasonal employees; (10) contract employees. Laird & Williams(1996) insist that analysis based on temporary employment should not be used to make inferences aboutcontingent employment, because the demographic composition and occupational distribution ofcontingent workers vary significantly by category. Although this may be true for empirical analysis, Ibelieve we can still make qualitative inferences at a broader level.5 According to Harrison & Kelly (1993), 57.4 percent of firms outsourced their machine operations in the

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constitute one form of contingent labour, to the extent that employment is contingent on

the client firms’ need to adjust to demand fluctuations. For statistical reasons,

outsourced personnel who are typically employed by consulting firms or firms which

specialize in certain niche areas, are not counted as contingent workers according to the

BLS classification since they are not paid by temporary staffing agencies nor are they

self-employed or independent contractors. Indeed, the distinction between what

constitutes contingent workers and what does not is open to considerable debate.

Estimates vary significantly by how contingent workers are defined. For example,

citing Belous’s estimates, a 1993 Time magazine article reported that contingent

workers accounted for a third of all workers in 1993 and that “their ranks are growing so

quickly they’re expected to outnumber permanent full-time workers by the end of the

decade.”6 Whatever the numbers, the fact remains that we are headed towards a

contingent and flexible economy. By focusing on one extreme form of contingent

labour, the temporary workforce, we should be able to draw wider implications about

why we are witnessing this trend toward flexibility.

1.2 Design and focus of the study

Temporary work arrangements involve three parties: temporary workers (or

temps), temporary staffing firms (TSFs) and client firms. Figure 1 illustrates this

arrangement as a supply, demand and intermediary relationship.

mid 1980s.6 Time, March 29, 1993.

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FIGURE 1 Temporary work arrangements

The TSF functions as a market intermediary or a broker who matches the supply and

demand for temporary work assignments. Temps are employees of the TSFs, i.e. they

are paid by the TSF and not by the client firms. As such, there is no direct employment

relationship between temps and client firms. This arrangement is a departure from

conventional labour markets in which supply and demand for labour are directly

matched. As will be discussed extensively in the following sections, the selling and

buying of human labour that take place within TSFs more closely resembles a market

for commodities rather than a market for labour. The TSF can be viewed as a retailer of

temporary workers, where client firms can purchase the necessary units of labour on an

as-needed basis.

Previous studies have focused on either the supply-side or the demand-side of

temporary employment. These studies have examined reasons for growth in temporary

employment (Abraham 1988, 1990; Golden & Appelbaum 1992; Harrison & Kelley

1993; Laird & Williams 1996), demographic composition and compensation structures

among temporary workers (Davis-Blake & Uzzi 1993; Kalleberg, et al 2000; Lenz

1996; Segal & Sullivan 1995, 1997), social and psychological ramifications of

Temporary workers

Temporary StaffingFirms (TSF)

Client firms

SUPPLY DEMAND

INTERMEDIARY

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temporary employment on workers (Henson 1996; Lee 1996; Rogers 1995), and legal

and policy implications of temporary employment (Dennard 1996; Hylton 1996).

My main contribution is to spotlight the temporary staffing firm itself, and to

study in more detail the actual temp-employer transactions that take place within

temporary staffing firms. The TSF is the CPU of temporary work arrangements, but

very little has been studied with respect to how these firms operate. Understanding the

process in which temporary workers are matched to jobs allows us to draw broader

inferences about why we are witnessing a trend toward a highly contingent economy.

In order to understand the industry in more detail, I conducted in-depth

personal interviews with twenty managers and directors from eight different temporary

staffing firms located in Philadelphia and the New York metropolitan area in November

1997. These managers and directors occupied key positions in marketing, sales, and

corporate communications. Interviews were performed at corporate headquarters and

on-site locations where actual temp-employer transactions take place. Interview

questions ranged from reasons for temporary employment growth to future industry

trends, but the principal objective of the interviews was to illuminate the temp-employer

matching process which takes place within TSFs. The study is the first phase of a larger

project currently under progress with the Nomura Research Institute in which we

compare and contrast the management strategies of temporary staffing firms in the US,

Europe and Japan.

In addition to the interviews, I conducted an extensive review of company

brochures and promotional material from firms included in the interview as well as

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firms not included in the interview, staffing industry publications, resources available

over the internet, and articles from major periodicals collected from the Lexis/Nexis

database.

1.3 The temporary staffing industry: an overview

Temporary staffing firms have undergone dramatic changes since they began to

take form in the 1950s. Traditionally, temporary employment was a means for filling in

during employee vacations or sick leave. The majority of temporary workers held

clerical and secretarial jobs. In the 1980s, temporary employment underwent both a

quantitative and a qualitative shift: the number of temporary workers doubled, and they

were required to perform a wider range of job assignments. The upward shift in

required skills accelerated in the 1990s as temporary workers were assigned to tasks

conventionally performed by permanent employees7. As the skill requirements became

higher, so did marginal revenue. Between 1990 and 1998, the industry’s revenue nearly

tripled from 20 billion to 59 billion dollars (Table 1). In 1996, 34 staffing firms were

included in the Inc. 500 ranking of fastest growing companies in the US 8. These

companies had achieved at least 600 percent sales growth between 1991 and 1995.

Although clerical work is still the largest portion of the temporary staffing

7 In this paper, I use the term “permanent workers” to denote regular full-time workers. “Long-term” maybe more appropriate but this could cause confusion since some temporary workers are assigned to long-term employment which may last several years. “Full-time” is equally confusing because most tempswork full-time (as opposed to part-time).8 Staffing Industry Review, 1996.

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industry’s payroll9 (40.5 percent), the fastest growing segment of the industry is the

professional category which includes accountants, attorneys, and management

specialists. The three categories of industrial, technical and professional now comprise

more than half of the industry’s payroll.

TABLE 1 Payroll composition of the temporary staffing industry (1998/1991)1991 1998 1998/1991

$ billion % $ billion % ratioOffice/clerical1 6.6 47.6 17.6 40.5 2.7Industrial2 3.8 27.4 15.0 34.5 3.9Technical3 1.9 13.4 4.7 10.9 2.5Professional4 0.3 2.4 2.8 6.4 8.3Other5 1.3 9.2 3.3 7.6 2.6

Total 14.0 100.0 43.4 100.0[SOURCE: National Association for Temporary Staffing Services 1999]1Secretaries, general office clerks, filing clerks, receptionists, typists, word processing operators, dataentry keepers, cashiers, etc.2Blue-collar occupations including manufacturing personnel, factory workers, shipping and receiving, etc.3Computer programmers, computer systems analysts, designers, drafters, editors, engineers, andillustrators.4Occupations in the accounting field (accountants, auditors, CFOs), legal (paralegals, attorneys),management (middle and senior management), sales and marketing professionals.5Health care, marketing, and other categories

Temporary staffing firms can be segmented along lines of industry10,

occupational category, and geographic location. For example, a TSF may have a niche

in a particular industry such as finance or telecommunications, while another TSF may

specialize in providing clerical or technical services only. Small TSFs operate locally

and their services will not extend outside of their region. On the other hand, large-scale

TSFs like Manpower, Olsten and Kelly have extensive networks nationally and in some

cases, internationally. They are also more likely to provide staffing services across a

9 Payroll consists of gross wages paid to temporary employees assigned to clients (NATSS 1997).

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wide variety of occupations and industries.

TSFs provide a variety of services to accommodate the demand for a flexible

workforce. Their services are not limited to temporary staffing, although this is

obviously the main service provided. Other services include outplacement, contract

staffing and training. A TSF may provide any combination or all of these services,

depending on its size and specialization. Outplacement, sometime referred to as

vendor-on-premise, is a service where the TSF allocates an entire division of workers to

fulfill a specific administrative function for the client firm. From the client’s

standpoint, outplacement is outsourcing. Outplacement includes such functions as

payroll, legal and regulatory compliance, and recruiting. Contract staffing is a service

targeted for independent contractors and the self-employed in need of coverage. The

TSFs provide a customized package of coverage (e.g. health, pension plans) in

compliance with IRS qualifications. TSFs also provide specialized training services for

client firms enabling them to keep abreast of latest technological developments. These

areas include telecommunications, customer services, telemarketing and computer

systems.

2 Growth of temporary employment: Some explanations

2.1 Flexible manufacturing and Just-In-Time production

It is not a simple task to disentangle the chain of events which has led to

10 Temporary work is not limited to the business sector. See for example “Teachers Are Temp Services’Top Choice” (Chicago Daily Herald, May 2, 1998).

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flexible employment practices. But a reasonable point of departure is what some

scholars conceptualize as the post-Fordism context – a movement from mass production

to flexible accumulation (Harvey 1995). In the face of diversifying consumer needs, the

inherent problem of Fordism could be identified as rigidity: “there were problems with

the rigidity of long-term and large-scale fixed capital investments in mass-production

systems that precluded much flexibility of design and presumed stable growth in

invariant consumer markets” (1995: 142). The need to respond quickly to variable

product demand gave rise to flexible manufacturing technologies, small-batch

production11 and sub-contracting, culminating in what has come to be known as Just-In-

Time (JIT) production.

JIT is often referred to as “lean production” (Womack, et al 1990) or the

“process of eliminating waste” (Roper, et al 1997). By establishing an intricate

hierarchical network of subcontractors, the firm can minimize market risk by

maintaining low levels of inventory and reducing their work force to the very core.

Insofar as JIT is production using parts and labour on an as-needed basis, JIT has had a

profound impact on labour management. One of the managers interviewed remarked as

follows:

In the 1980’s the labour force was influenced by the just-in-time practice of management,which triggered the movement to strategic, flexible staffing.

Flexible staffing is a form of JIT management where the production unit is human

11 Harrison & Kelley (1991) find that use of temporary workers was positively correlated with productdiversity (measured by the batch-size of production).

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labour. Like any other form of input, human labour became a more atomistic element

of production. The need to respond quickly to market changes forced firms to shed

excess labour and maintain a minimal permanent workforce.

The two features just discussed – minimizing inventory and permanent workers

– are metaphorically synonymous, i.e. although inventory (or stock) is a term commonly

used in association with physical capital (e.g. parts and machinery), it can be viewed to

represent human capital. Rogers (1995) explains:

A term previously reserved for money-saving inventory control systems has been adoptedto describe this new workforce: “just-in-time.”... The worker is conceptualized as a workinput and is managed in much the same way as inventory or machines. (1995: 139).

In essence, the penetration of JIT practices has blurred the distinction between physical

capital and human capital.

From the perspective of labour management, inventory control is equivalent to

head count control (the number of permanent employees on the firm’s payroll). Since a

firm’s performance (productivity or sales) is assessed by using the number of permanent

employees as the denominator, firms are constantly under pressure to minimize their

permanent workforce (Pfeffer & Baron 1988), implying the firm’s hesitation to hire new

workers. It has also become more difficult to fire workers in recent years, in light of the

increasing “costs” of dismissing workers12. In this context, costs include not only

12 Wrongful discharges may violate anti-discrimination laws as well as a host of other civil rightslegislation. This has led to the gradual erosion of the employment-at-will doctrine. See for exampleAbraham (1988, 1990), Lee (1996).

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litigation costs, but also the negative publicity associated with downsizing practices13.

A manager explains the inherent complexities of head count control:

For firms, head count has become an important measure for labour management. Thecosts of firing – mainly negative publicity and litigation costs – made it more difficult tohire and fire workers. These days, HR departments are becoming extremely sensitivetowards public relations issues.

In fact, Kalleberg, et al (2000) find that managers who are committed to avoiding

layoffs were more likely to use temporary employment and other forms of employment

intermediaries, and less likely to use only full- and part-time employees. They further

find that organizations seeking to avoid layoffs were more likely to use temporary

employment across a larger number of functions.

In sum, the penetration of JIT practices has made it increasingly more difficult

to hire and fire permanent workers14. These forces, coupled by the need to remain

flexible and responsive to market changes, intensified demand for temporary labour.

Since temporary workers are paid by the TSFs, they do not appear in the client firm’s

head count. Freed from the complexities of head count control, firms were able to take

full advantage of a workforce which represented flexibility in its purest form.

The increasing reliance on temporary workers gave rise to a core/periphery

separation of workers within a single firm – a distinction which has been termed the

dual internal labour market (Mangum, et al 1985). The dual internal labour market and

its implications will be discussed extensively in the following sections. But first, I

13 For an extensive discussion on the effects of downsizing, see Baron & Kreps (1999) and De Vries, et al(1997).14 Unions may view the use of temporary workers as a threat, insofar as it inhibits the hiring of permanentworkers. Golden & Appelbaum (1992) find that temporary workers were less likely to be used among

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discuss how market risk and uncertainty can trigger the demand for temporary

employment. Since the growth of temporary employment is often attributed to the skill-

biased nature of technological change, the following discussion emphasizes the ways in

which technological change affects the demand for temporary employment.

2.2 Risk and uncertainty: The case of technological change

Technological change introduces uncertainty into the labour market by

triggering short-run fluctuations in demand. How long it takes for the market to adjust

to these shocks is a function of how quickly the technology can be diffused and

standardized into the production process. Technology is constantly in a state of flux.

Some technologies undergo continuous improvements while others become quickly

obsolete. Under these conditions of uncertainty, firms must decide whether to

internalize the particular technology in their production or to forego the decision until

they have better information. Internalizing the technology requires large-scale

investments because in addition to investments in physical capital (i.e. factories and

machines) firms must invest in human capital in the form of job training – training

which is geared specifically for the purpose of using the particular technology at hand.

Accompanying this decision is the risk that the technology could become obsolete, i.e.

the firm has made a bad investment. This is when firms downsize; they must quickly

de-invest the acquired units of physical and human capital since they are no longer

deemed as good investments. According to Department of Labour estimates, more than

highly unionized firms.

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eighty-five percent of the people unemployed in the previous economic downturn were

structurally (i.e. not cyclically) displaced workers whose jobs were unlikely to return.

As the pace of technological innovations accelerates, risk and uncertainty

intensify and firms are less likely to internalize the technology. Pfeffer & Baron (1988)

explain:

When new skills are required, one merely contracts with a different company or uses adifferent set of temporary workers, rather than confronting the costs of retraining thepermanent workforce. Interviews with people in the temporary help industry suggest thatthis is precisely why many organizations have externalized much of their data and wordprocessing – they will not have to worry about making fixed investments in personnel andtraining, only to find the workforce made obsolete by new hardware and software. (1988:273)

Using the Ben-Porath model, Bartel (1993) shows that “higher rates of obsolescence are

likely to decrease the amount of investment (in human capital).” Rather, firms are

likely to turn to contingent employment alternatives such as outsourcing and temporary

employment in order to minimize the risk associated with costly technological

investments.

The rapid penetration of information technology has been the primal force

behind the sudden growth of contingent employment in the 1990s. A 1996 Business

Week article entitled “Let’s Order Out for Technology” suggests that “today, Corporate

America can’t outsource data centers, computer networks, PC support services, and

software development fast enough.” The article reports that some 20 percent of the

largest US companies now use some form of technology outsourcing. Reflecting the

firms’ hesitation to internalize technology, a partner specializing in outsourcing is

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quoted as saying, “people want to buy knowledge, not develop it themselves.”

Not surprisingly, IT related job assignments have become the cash cow of the

temporary staffing business (see Table 1). Demand for office/clerical occupations has

continued to expand, particularly in data processing. One manager explained that “the

migration from a mainframe to client servers increased demand for workers at the ‘shop

floor’.” At the high end of the skills hierarchy are system engineers and computer

programmers. One manager explained that, “in the technology end of the market, there

are more jobs than people.” A recent Boston Globe article entitled “Temp Agencies

Find It Hard to Fill Glut of High-tech Jobs” describes how TSFs are “facing a perennial

shortage of high-tech workers.”15 Because TSFs charge a higher margin for their

workers employed with specific IT skills, these work assignments have become the

profit centers of the temporary staffing business.

Most TSFs provide technical and industrial staffing support, but some

establishments like Volt, CDI and Corestaff specialize in providing IT and light

industrial employment. In recent years, large-scale TSFs have made headlines by

outplacing massive droves of workers to meet clients’ needs to outsource particular

functions.

3 Temporary labour market: A spot-market model?

As the pace of technological change accelerates, labour market responses

become shorter in duration. In a purely theoretical context, imagine a situation in which

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these adjustment cycles become shorter and shorter until it reaches a point where the

market responds instantaneously to exogenous changes. This extreme form of

instantaneous market transactions is the spot market.

The spot market model is commonly used in economics textbooks for heuristic

purposes. It is a purely theoretical apparatus which has traditionally been applied to

analyze effects of supply and demand changes on quantity and price in commodity

markets. Block (1990) describes the spot market as follows:

The actual markets that are closest to (the spot market) are contemporary stock markets,commodity markets, and foreign-exchange markets in which traders on the market floorrepresent a multitude of different buyers and sellers and engage in very rapid transactionsthat are driven almost entirely by price considerations. (1990: 45)

Because it is supply and demand in its purest form, the model rests on a number of

simplified assumptions. With regards to the labour market, these assumptions are

summarized in the first column of Table 2 (edited from Reynolds, Masters & Moser

1991).

These assumptions state that the market is free to adjust to changes in supply

and demand, that it is price driven, and that there is perfect information in the labour

market. Obviously, each assumption is highly questionable, and it would not be an

overstatement to claim that the objectives of labour economics and sociology have been

to argue why the spot market cannot be applied to real life situations. Theories which

have evolved in this regard are summarized in the second column of Table 2. These

theories (loosely termed as “institutional” models) have been developed to explain such

15 The Boston Globe, June 7, 1998.

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phenomena as long-term employment and why workers’ wages rise with work

experience. However, the market for temporary employment exhibit features which are,

if anything, closer to the spot market model than these theories would dictate.

TABLE 2 The dual internal labor market: spot market vs institutional modeldual internal labor market

periphery = temporary workers core = permanent workers transaction costsspot market model* institutional model

Workers and employers are free to enter orleave the market at will, and workers canmove freely from one employer to another.

Supply shifts are flexible upward but notdownward with respect to both wagesand employment levels. Hiring newworkers incurs search and hiring costs.

search costshiring costsfiring costs

All job vacancies are filled through themarket. We ignore the fact that in practicemany vacancies are filled through internalpromotion.

Employees receive job training, jobsecurity, internal promotion, and fringebenefits. Workers are promotedinternally because employers have betterinformation, and promotion from outsideincurs search costs. (Doeringer & Piore1971)

search coststraining costs

Workers are interchangeable in the eyes ofthe employer and are of equal efficiency.We overlook the fact that workers differ inefficiency and that to achieve fullefficiency on a particular job usuallyrequires a training period.

Employer’s long term interests areassumed to override short term interests.Workers accumulate firm-specific skillsthrough training and become moreattached to the employer. Employers areless likely to dismiss workers becausethey must reap the benefits of training.(Becker 1993; Mincer 1962)

training costsfiring costs

The cost of labor is measured by its hourlywage rate. Since we assume no costs ofsupervision and no fringe benefits, theemployer’s cost of labor is equal to thewage rate.

Wages are determined by the job not theindividual. Providing on-the-job trainingincurs significant costs to the employer.(Thurow 1975)

training costs

Workers and employers are well informed.Workers know about vacant jobs, the wagerates they pay, and other terms ofemployment. Employers know aboutworkers available for employment, andthey know what wage it will take to attractthem.

Imperfect information and uncertaintypervade the market. Employers do nothave information on worker productivityex ante. Since employers must trainworkers to raise their productivity,“trainability” is a key determinant ofhiring decisions. (Thurow 1975)

search costsscreening costs

* Edited from Reynolds, Masters & Moser 1991

The decision to externalize or internalize a specific task is best understood in

terms of transaction costs, mainly the costs associated with hiring, firing, screening and

training workers (Table 2, third column). Highly institutionalized labour markets incur

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high transaction costs. In contrast, a spot market is a “pure form of market-mediated

arrangement” (Williamson 1975) involving zero transaction costs. Firms resort to

external labour markets when the benefits of doing so outweigh its transaction costs. In

this regard, we could argue that the temporary labour market grew because the

transaction costs of externalization were smaller than the costs of internalization.

Transaction costs are the costs associated with the selling and buying

transactions between labour supply and labour demand. Therefore, assessment of

transaction costs requires a closer examination of the ways in which labour supply and

labour demand are matched together in the market. In the following section, I examine

in great detail the process in which temps are matched to job assignments, and discuss

how the temporary labour market more closely resembles a spot market. Since very

little has been studied about matching transactions, I rely heavily on qualitative

evidence obtained from my interviews with managers of temporary staffing firms.

In the outset, I must remind the reader that because the spot market is a purely

theoretical model, we could never fully state that a market is a spot market, and this

holds true for commodity and stock markets. For example, in a purely theoretical sense,

the role of the TSF itself violates the assumption of perfect information, because if

employers and temps shared perfect information, perfect matching would take place

among themselves without TSFs. Lending from terminology in other markets, the

temporary staffing firm is a temporary staffing exchange. It is an exchange floor where

dealers buy and sell human labour over a market interface.

My purpose, then, is to illustrate how the temporary labour market shares the

21

principle features of the spot market, and how it departs (or reverts) from the

institutional model. In Section 3.2 I reevaluate the spot market features in light of the

new findings. Implications will be discussed in Section 4.

3.1 How temps are matched to jobs

Employment applications

Applicants seeking temporary employment are all asked to fill out job

application forms which are later entered into the TSF’s central database. Applications

may be submitted to the TSF in person, by mail, or in the case of large-scale TSFs, over

the internet. Applicants are typically asked to provide the following information:

contact information, job preference (type and location of employment), educational

credentials, employment history, job skills and references. For clerical/office workers,

job skills normally consist of basic computer skills such as the ability to do word

processing and use spreadsheets. Applicants seeking technical and professional

positions are often asked to select their area of specialization from a separate form

which consists of a detailed list of job skills. The list includes such areas as computer

programming, accounting expertise, legal expertise, and foreign languages. Each skill

is coded, and whatever the applicant checks off is later entered into the database as the

applicant’s area of specialization.

The TSF’s database has the capacity to determine the market wage of each

applicant based on the applicant’s information, mainly education, experience and skills.

This lends strong support to the neo-classical position that workers have unique

marginal products. To reverse the terminology used by Thurow, marginal productivity

22

is inherent in the man and not the job. Standardization of skills is the engine that

capacitates the determination of market wages.

The standardization process does have drawbacks, however, mainly because no

list can be complete and there could be significant variance within a skill category. The

latter is particularly prevalent among low-skilled categories such as basic computer

skills. One manager explains:

In our firm, most temps claim they have some proficiency in a computer application andmany demand higher rates. It’s becoming more difficult to differentiate.

As the skill category moves up the scale, differentiation problems become less serious

because the higher-level skills are more specialized and the number of qualified workers

become fewer. The premium margin is definitely tilted toward the upper end of the

skill distribution.

The trading room

Central to the everyday transactions of the temporary staffing firm is the

‘trading’ facility. This facility is divided up into several sections, each section serving a

distinct function. First there is the reception area. Applicants seeking temporary

employment are asked to fill out an application form which are later entered into the

TSF’s database. Then there are the training rooms where temps receive basic computer

training.

Behind the reception area is the ‘trading room.’ This is where the actual

23

placements take place. The personnel that work in this section are called ‘dealers.’ The

trading room is separated into two sections by a shoulder-high partition. One side is

called the supply-side, the other the demand-side. Supply-side dealers look for jobs

based on applicants’ information and requests. Demand-side dealers look for temps

based on the needs of client firms.

Most transactions initiate from the central database which contains information

from both the job applicants and the client firms. A typical transaction initiates when

the dealer enters an applicant’s request into the database. These requests may consist of

such information as job content, location and working hours. The database then

generates a list of potential jobs based on these requests. The dealer contacts the job

applicant to discuss the list of jobs16 at which point the applicant may decide if s/he

wants to take the job. If the applicant declines to take any of the jobs, her requests are

filled out at a later date when the database is updated with more recent job information.

A similar transaction takes place on the demand-side where the dealer instead enters

requests for specific workers such as availability, skills and experience. In return, the

database generates a “shopping list” of potential workers with their respective market

wages.

Although the database is updated daily with information from both the supply

and demand side, there is a slight time lag in the updating process. This happens

because application forms which are filled in on paper must be fed into the system, and

sometimes job applicants and client firms may contact dealers directly over the phone.

16 Some applicants may actually come into the trading floor to go through the process alongside the

24

This is frequently the case when the nature of the requests are urgent, e.g. an immediate

request by a client firm asking for twenty data entry personnel within two days. As a

result, situations arise where demand side dealers may have the latest information on

job openings while the supply side doesn’t and vice-versa, because the information is

yet to be entered into the database. In these cases, the dealers, instead of relying on the

database, rise from their chairs to call out to the dealers on the other side of the

partition. They may simply announce the latest request information received over the

phone, or they may be asking questions in order to fulfill certain requests. For example,

a demand side dealer may call out, “hey, whatever happened to so-and-so? Is she still

looking for a job?” while a supply side dealer may yell out, “hey, is that job opening on

the east side still available?” Not surprisingly, the manager on premise readily

explained that ‘trading room’ and ‘dealers’ were termed from the trading floors at Wall

Street.

The employment superstore

The stock of workers registered in the database is the central asset of TSFs.

The product line-up, in terms of both quantity and quality of the workers, becomes a

key element of differentiation from other TSFs. As the buying and selling of workers in

the trading room become more systematic and routine, it begins to resemble a

transaction of commodities. One manager remarked:

dealer.

25

We are like an employment superstore. Availability is the key issue. You don’t want towalk into a store and not find what you’re looking for, right?

Other managers had similar comments like “convenience store,” “supermarket” or

“clearinghouse.” Moreover, competition over availability is headed in the direction of

vertical integration and geographic (or horizontal) expansion. As the market for

temporary staffing expanded, client needs became increasingly more diversified and

TSFs were required to fulfill a wide range of job assignments. Vertical (or seamless)

integration is a response to market changes which enable TSFs to provide workers at all

levels of the organization, from clerical workers to high-level executives – “from the

mail room to the board room” as one manager put it. TSFs are also aiming for

geographic expansion. Many of the large-scale TSFs already have offices located in

different regions of the country as well as overseas. The advantages of a large-scale

TSF is what marketers refer to as “one-stop-shopping.”17 For client firms, benefits

include being able to “purchase” workers at all levels – clerical, technical or managerial

– from a single vendor. This simplifies the search process as well as the billing process.

For example, one manager explained a particular firm who recently became a client

after using multiple vendors. In the process, the firm was able to switch from a system

of using over thirty vendors to just one, and reduce service costs by fifteen percent.

This also had the desired effect of simplified billing since “the client now knows exactly

how much they’re paying for on a single interface.” The TSFs are aiming for what one

manager refers to as the “one-stop-vendor of human resources.”

17 The telecommunications industry presents a good example of “one-stop-shopping” practices in other

26

Response time

Closely related to the issue of availability is response time. A manager

explained that, “it’s not just how many people you have but how quickly we find them.”

An analogy to the commodity market is how quickly you fill in the orders or deliver the

goods. One manager explained the response time in the context of rapid technological

change:

The pace of change in IT is becoming so rapid that companies don’t want to train theirworkers. The costs of training them in-house would kill them. So the requests tend to beimmediate ones. Our strategy is to find and respond to their requests as quickly aspossible.

Competition over response time has led to improvements in database systems. Many of

the large scale TSFs have developed a system where applicants can submit resumes and

search for jobs over the internet18.

The relationship between response time and availability is a function of the

skill demanded by the assignment. With low-skilled assignments (e.g. clerical),

response time is very quick as TSFs are able to locate workers locally. High-skilled

assignments by nature tend to be more specific requests. Additionally, clients pay more

for these workers, so TSFs spend more time searching for the perfect match. In many

instances, TSFs may contact other regional offices and a qualified worker may be called

industries (see for example, New York Times , June 29, 1998).18 See for example Manpower at http://www.manpower.com/cgibin/ndCGI.exe/resume/pagSubmitResume and Olsten at http://www.worknow.com/work/work_frames.html.

27

in from another region to fulfill the request19.

Customer satisfaction

Like any establishment that sells products, TSFs have customer satisfaction

policies. In order to ensure a quality match and improve customer satisfaction, most

TSFs offer testing periods where the client firms can monitor the performance of the

temporary workers. If the worker does not meet expected quality, the client may

“return” the worker in exchange for another, or terminate the employment altogether.

Testing periods typically last two to three business days. However, this may vary

significantly by the type of job assignment. Normally, higher-wage workers such as IT

specialists have longer testing periods.

Not surprisingly, the quality of the placement is a main concern for client firms

as well. The following excerpt appeared in the Frequently Asked Question section of a

TSF’s brochure:

Q: What happens if the employee doesn’t work out?A: (We are) confident in our ability to provide quality temporary employees; however, iffor any reason you should be dissatisfied with the performance of (our) employee, notifyus immediately and we will identify a replacement.

Since testing periods are short lasting, it is difficult to accurately assess

workers and clients may face quality problems afterwards. What happens in these

situations varies significantly by the TSF as well as the context of the relationship

19 This description is consistent with the neoclassical explanations of search costs. See for example Rees(1966) and Stigler (1961).

28

between the client and the TSF. The TSF may adhere to the employment contract and

take no action, or it may choose to replace the worker. In some cases, the TSF may

allow the client to cancel the contract. But often there is room for negotiation between

the client and the TSF and such decisions are made in the best interests of both parties.

Lease or purchase?

Technically speaking, client firms do not purchase temporary workers, they

lease them. Clients lease the necessary units of labour and return them when their

objectives are met. But like any lease or rental agreement, the clients are given the

option to buy when they find a good quality worker. This arrangement is known as

“temp-to-perm” (stands for temporary-to-permanent). A manager explained the benefits

of the temp-to-perm arrangement:

Temp-to-perm has benefits for both the staff and the firm. For the firm, it’s like a longtesting period where they can screen out the workers they desire to keep. For the staff, it’san opportunity to find permanent placement.

This explanation fares well with actual data. A 1994 NATSS survey found that

38 percent of the temporary workers had been offered a full-time job at the firm where

they were on assignment. Focus group interviews have shown that many employers are

wary of using educational credentials as a sound predictor of job success. Instead of

hiring new graduates with no work experience, employers have come to rely more on

29

temporary employment as screening tools20. According to the Upjohn Institute for

Employment Research, more than half of companies that increased their use of

temporary help workers in the 1990s were motivated by a desire to fill permanent

positions 21. Among these companies, 24 percent did so to screen candidates for

permanent jobs and 37 percent did so because they found it difficult to find qualified

workers on their own. On the other hand, the majority of temps are looking for

“traditional” work arrangements (BLS 1997). Temporary employment is an opportunity

which allows temps to preview the workplace before they commit to a permanent job.

Most TSFs offer temp-to-perm arrangements but their positions vary. For

example, some firms advertise temp-to-perm in their promotional brochures but others

do not. When asked about these differences, one manager explained that the practice

had become so prevalent that many TSFs do not advertise it anymore; it’s assumed.

Another manager explained that temp-to-perm was but a byproduct of the temporary

employment business. As the business matured, more clients began to take advantage

of temporary work arrangements as an effective screening method for permanent hires,

and more workers began to view temporary work as a stepping stone to permanent

placement. Temp-to-perm was a natural response to these changing market conditions.

3.2 The spot market model revisited

Trading room, superstore, shopping list and testing periods. Needless to say,

20 New York Times, February 20, 1995.21 Cited from American Staffing Association Annual Report 1998.

30

these are vocabularies commonly associated with commodity markets. But just because

the market resembles a commodity market does not necessarily imply that it is a spot

market. Here, I review how the previously stated assumptions of the spot market

resembles the features of the temporary labour market.

• Workers and employers are free to enter or leave the market at will, and workers canmove freely from one employer to another.• All job vacancies are filled through the market. We ignore the fact that in practice manyvacancies are filled through internal promotion.• Workers are interchangeable in the eyes of the employer and are of equal efficiency. Weoverlook the fact that workers differ in efficiency and that to achieve full efficiency on aparticular job usually requires a training period.

Put another way these assumptions state that the market is driven purely by

supply and demand forces. The market for permanent workers does not fare well with

this notion, mainly because of its inherently difficult adjustments to downward forces in

demand. This is the main underlying rationale for employers to tap into the temporary

labour market. Employers can take advantage of the temporary workforce without

affecting their permanent workers, and without incurring transaction costs associated

with adjusting the labour force. Recall that the very definition of temporary workers is

that they do not have an explicit or an implicit contract for their employment. In this

regard, the supply and demand of temporary workers are free to adjust to business

cycles.

The market for permanent workers and temporary workers coexist within a

single firm in the form of a dual internal labour market. While permanent workers may

share the benefits of the internal labour market – employment stability, promotion

31

ladders and training opportunities – the temporary workers do not. Temps come into

firms to fulfill a specific assignment and leave when the task is completed. Because of

their short duration, firms have no incentive to train these workers so the temps do not

accumulate firm-specific skills. Rather, temporary workers are compensated based on

their general skills. Their human capital is portable or exchangeable across different

firms. “Temp-to-perm” can be viewed as an arrangement where a firm purchases the

workers and temps make the transition into the firm’s internal labour market. In doing

so, the firm is able to economize on search and screening costs.

• The cost of labour is measured by its hourly wage rate. Since we assume no costs ofsupervision and no fringe benefits, the employer’s cost of labour is equal to the wage rate.• Workers and employers are well informed. Workers know about vacant jobs, the wagerates they pay, and other terms of employment. Employers know about workers availablefor employment, and they know what wage it will take to attract them.

The temp-employer matching transactions are generated through the TSF’s

central database. Further, TSFs have developed a standardization system of skills where

market wages can be determined by the temp’s profiles. Another words, each

temporary worker commands a market wage, a wage which is determined solely by

general skills. Both the temps and the employers are well informed. The database

generates information such that employers can view the availability of workers and their

commanding wages in the form of a “shopping list” and workers can view the

availability of potential job assignments. Moreover, the database has the capacity to

generate information and process matching transactions in real time. Competition over

response time is headed in a direction of instantaneous transactions.

The principle features of the temporary labour market shares close resemblance

32

to the spot market – a frictionless market which allows employers to minimize

transaction costs. Because the market is able to behave like a spot market, it is a

powerful explanation behind our current economic expansion characterized by

aggregate employment growth without accompanying increases in real wages. This is

the central discussion of the next section.

4 Macro-level implications

A 1998 New York Times article reported that “far more than in the 1970s,

companies are using other recruiting tactics to dilute wage pressures.”22 Contingent

employment is a big part of the “other recruiting tactics.” On a similar note, Belous

(1989) states that among the benefits of contingent employment use is “the ability for

the economy to sustain economic growth and not rekindle high levels of inflation.” In

this section, I apply a supply and demand framework in an attempt to illustrate the

relationship between contingent employment23, unemployment and wage changes, in the

context of the recent economic expansion in the US.

A situation in which aggregate employment expands without wage increases

could be one of two scenarios (Figure 2). First, the labour supply curve could be flat.

Second, both the supply and demand curves could be shifting at the same rate, thereby

offsetting wage increases. The critical difference in the two is that the size of the labour

22 New York Times, April 6, 1998.23 To the extent that employment is contingent on the client firms’ need to adjust to demand fluctuations,contingent workers and temporary workers constitute similar work arrangements from the perspective ofthe employer. Henceforth, much of the discussions in this section draws inferences to contingentemployment practices.

33

force is fixed in the first scenario. In the second scenario, the shift in the labour supply

curve implies that the labour force itself has expanded. The influx of workers from E0

to E1 suggests that the labour market has tapped into a different pool of workers.

Under the first scenario, an increase in demand will eventually lead to job

vacancies as there will no longer be workers available to hire. Also, the labour supply

is so highly elastic that even a small change in wages will trigger a massive jump in

employment. But this has not happened. Instead, there is widespread evidence of the

increasing proportion of contingent workers which lends strong support for the second

scenario. I explore this in more detail below.

FIGURE 2 Relationship between employment and real wages

FIGURE 3 The role of contingent employment

LD

LS

realwages

employment

LD’

LS

employment

LS’

E0 E1 E0 E1

LD LD’

w/p w/p

scenario (1) scenario (2)

realwages

LS

employment

L’S

EA EC

LD LD’

w*

L”SwB

wD

A

B

C

D

realwages

→

34

Suppose the economy was in equilibrium at point A in Figure 3. LS represents

the supply of permanent workers. As the economy expands, the demand curve shifts

outward from LD to LD’ along the supply curve LS and a new equilibrium is attained at

B. This causes a raise in wages from w* to wB. The problem with this approach is that

when the economy contracts, the demand curve shifts back along LS accompanied by a

decrease in wages. But this backward movement runs into the problem of sticky wages,

i.e. wages having once risen do not fall back easily. The same can be said for decline in

employment. Recall the previous discussion concerning head count control, mainly that

it is becoming increasingly more difficult for employers to dismiss their workers. These

are the inherently difficult problems confronting the permanent labour force: wages and

employment are flexible upwards but not downwards.

As a consequence, employers have become more cautious about raising wages

relative to the past24. Rapid technological change has made it increasingly more

difficult to forecast how long the current economic expansion can be prolonged. So

employers resort to a tactic in which they expand overall employment while pegging

wages (movement from A to C) at w*. Expanding in this sense implies tapping into a

different source of the labour force – in this case, the contingent workers. To

accommodate shift in labour demand, the labour supply curve shifts from LS to LS’. At

C, the new equilibrium point, the economy has expanded from LD to LD’, employment

has expanded from EA to EC, while wages remain fixed at w*. If the labour supply

curve shifts out at a faster rate relative to the demand curve, the result is an actual

24 See for example comments made by Jared Bernstein, labour economist at the Economic Policy Institute

35

decline in wages, from w* to wD.

Another advantage in using contingent employment, discussed previously, is

that employers do not have to be concerned with employment disputes when the

demand for labour declines, that is, when LD’ shifts back toward LD. By reducing

contingent labour at the same rate as the decline in demand, employers can reduce

excess employment without affecting wages and without reducing their permanent

workforce.

The use of contingent workers supplementing permanent workers is sometimes

referred to as a “blended workforce” (William Olsten Center for Workforce Strategies

1997). The flexible workforce was traditionally viewed as a mere means for filling in

short-term assignments. However, in recent years, client firms are taking a more long-

term approach to flexible staffing. While permanent workers are still allocated to core

business activities, more temporary workers are being called in to perform assignments

that require specialized skills.

[SOURCE: William Olsten Center for Workforce Strategies 1997]

in New York Times , April 6, 1998.

supplementalflexible

workforce

coreflexible

workforce

regularfull-time

staff

workflow

launch

projectpenetrate

new marketbusy

season

custom

orderinventory

summer

doldrums

economic

slowdown

36

FIGURE 4 The blended workforce

The blended workforce suggests a three-tier employment system (Figure 4):

supplemental flexible workforce, core flexible workforce, and regular full-time staff.

Of particular interest is the so-called “core” flexible workforce. Workers who belong to

this category are appointed to longer-term assignments relative to those in the

supplemental flexible workforce. This trend points to a seemingly ironic feature of the

flexible employment strategy: the flexible workforce is becoming a permanent feature

of the business environment 25.

It is worthy to note how the features of the blended workforce mirrors the

relationship discussed in Figure 3. By strategically implementing the flexible

workforce, employers can buffer the changes in the business cycle without affecting

their permanent workforce. Thus, criticisms that decry the threat of the temporary

workforce on the permanent workforce fall short of the mark in this regard. The

flexible workforce is a complement (supplement) to the permanent workforce, not a

substitute.

The buffering effect suggests that the flexible workforce is more susceptible to

market changes – a feature which has been confirmed by many empirical studies

(Abraham 1988, 1990; Davis-Blake & Uzzi 1993; Golden & Appelbaum 1992;

Mangum et al 1985; Segal & Sullivan 1995). For example, Segal & Sullivan (1995)

have shown that the growth of temporary employment “is much more volatile than

37

aggregate employment, falling more during economic contractions and rising more

during expansions.”

Flexible employment strategies can be a cost-minimizing solution as well (see

for example Kalleberg, et al 2000). According to 1997 BLS estimates, median weekly

earnings of temporary workers ($329) were less than two-third of the earnings for

workers in traditional arrangements ($510)26. Although an accurate cost comparison

cannot be made since these are estimates of how much the workers earn and not how

much employers pay for these workers, the cost differential is likely to be larger when

comparing total compensation. BLS reports that 46 percent of temporary workers had

health insurance coverage from any source, and only 4 percent participated in a pension

plan at work. Corresponding numbers for workers in traditional work arrangements

were 82 percent and 44 percent respectively. Similarly, Kalleberg et al (2000) report

that even among workers in non-standard work arrangements, temporary workers were

more likely to earn lower wages, and least likely to receive health benefits and pension

benefits. Minimizing overhead is thus a great incentive for employers to use temporary

workers. Empirically, Mangum et al find that firms were more likely to use temps when

the level of fringe benefits provided was higher.

These ingrained features are the main reasons behind the explosive growth of

temporary employment: an employment buffer to protect the permanent workforce

which also acts as a cost-minimizing tool.

25 See also similar arguments by Larson (1996) and Nollen (1996).26 Median weekly earnings of workers in both categories vary significantly by occupation (BLS 1997).

38

5 Summary and discussion

In recent years, growth rate of temporary employment has far surpassed the

growth rate of aggregate non-farm employment. Market uncertainty, such as the rapid

pace of technological change, has given rise to a practice where employers hesitate to

hire workers into their core workforce. The result is a just-in-time practice of human

labour in which employers purchase skills on an as-needed basis, much like the ways in

which commodities are bought and sold in the commodities exchange. The growth of

temporary employment can be attributed to its spot market features which allow

employers to adjust freely to market changes while minimizing transaction costs.

The increasing use of temporary employment practices has attracted some

attention from policy-makers. There is rising concern that temporary workers are being

exploited, and that employers are filling temps into positions which would otherwise be

held by permanent workers. Although policies aimed at bettering the benefits and well-

being of temporary workers have been introduced (e.g. Part-Time and Temporary

Workers Protection Act) none are yet to be legislated. The reason for this hesitation is

believed to be an economic one. If such a policy were enacted, it would raise the cost of

using temporary workers relative to permanent workers, and the incentive to use

temporary labour would diminish. While this in itself may be an intended effect, the

loss of flexibility would imply overall rigidity in the labour market. Efficiency loss will

be inevitable, and eventually stunt economic growth. Perhaps the optimal solution rests

in the hands of the market forces, for now.

39

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