Temporary Employment Doesn’t Have to be a Bad Deal for Workers

Thursday, January 11, 2018

Is the American economy’s creation of fewer traditional full-time jobs a sign of weakness, or just changing times? In a fascinating 2016 study, economists Lawrence Katz and Alan Krueger look at trends over time in so-called “alternative work arrangements,” work that falls into four categories:

  • Independent contractors — individuals who obtain customers on their own
  • Workers provided by contract firms — individuals working for a company that contracts out their services
  • Temporary-help agency workers — individuals also contracted by a firm but generally for lower-skilled and shorter-duration work
  • On-call workers — individuals who are on standby to be called to work

Strikingly, the authors find that 94 percent of net job creation between 2005 and 2015 (9.1 million jobs) fits these alternative arrangements (8.6 million), job creation that raised the percentage of workers engaged in such arrangements from 10.7 percent in 2005 to 15.8 percent in 2015.

This trend has been well-documented, but Katz and Krueger’s data are more detailed than most and refute a couple of widely held myths or assumptions about this transition in the workforce.

Myth #1: The transition is happening because of the sharing economy

The increase in alternative work arrangements is not being driven by online platforms like Uber and TaskRabbit that many call “the sharing economy.” The authors found that only 0.5 percent of workers in 2015 stated that they worked with an online intermediary.

So who are the people behind the net increase of over 8 million alternative work arrangements? Two-thirds of the increase from 2005 to 2015 came from independent contractors — those who offer their products and services directly to buyers without working for a company — and people working for contract firms. Both categories are typically professionals or skilled workers. For example, law firms often hire attorneys by contract.

Myth #2: The transition is driven by millennials

I love finding a piece of data that completely confounds my expectations. The age breakdown of workers in alternative arrangements does exactly that. The percentage of workers of age 16–24 in alternative arrangements actually fell from 7.1 percent in 2005 to 6.4 percent in 2015. Workers of age 25–54 went from 10.4 percent to 14.3 percent. Most surprisingly, workers aged 55–75 saw the biggest increase in alternative work arrangements, from 15.1 percent in 2005 to 23.9 percent in 2015. So much for my mental image of a struggling millennial artist in Brooklyn squeezing out a living on TaskRabbit.

The increase in alternative work arrangements does not appear to be driven by education, gender, or ethnicity. The four occupations that experienced at least a 10 percentage-point increase in alternative work arrangements from 2005 to 2015 were computer programming, social work, personal care providers (such as home health aides), and farming (likely seasonal workers).

Myth #3: The transition is bad for American workers

The Wall Street Journal, not exactly a populist rag, begins its story on the Katz and Krueger study by saying, “Never before have big employers tried so hard to hand over chunks of their business to contractors. From Google to Wal-Mart, the strategy prunes costs for firms and job security for millions of workers.” But, informed by the data above, we see that the transition to alternative work arrangements is far more of a mixed bag.

Many types of firms experience ebbs and flows in demand. This was particularly true in my old career as an economic consultant, and when a big project would come in, we would augment our staff with contractors. Had we been required to take them on full-time, with full training and benefits, we would have hired far fewer people, or perhaps not taken on the extra business at all. The availability of temporary or contract work makes labor far less “lumpy” for firms and can lead to heightened economic activity.

Many contract workers seek full-time jobs: Katz and Krueger found that over three-quarters say they would prefer a permanent job. But they’re able to pay the bills while they look for full-time employment. This arrangement works particularly well for budding entrepreneurs, who can take on contract work to make ends meet while trying to get their ideas off the ground.

The vast majority of U.S. employees still work on a traditional full-time basis, and companies part with knowledge and experience of long-time workers at their own peril. But the data do show a transition to alternative work arrangements is underway. This transition is not without its disruptions, such as regarding workers’ ability to obtain health care. But this doesn’t mean that changes in the way we work are bad. It means we need to let the market catch up to the changing times. The days of “company men” working at the same firm for their entire career are largely over, and paternalistic government regulations that require that one get health insurance and other benefits from one’s employer are rapidly becoming out of date. Once again, public innovation lags behind innovation from the private sector.

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Max Gulker, PhD

Max Gulker joined AIER in 2015. His primary research areas are applied microeconomics and industrial organization. Max previously worked as an economist for Keystone Strategy, supporting expert testimony for antitrust and intellectual property litigation in high tech industries. Prior to that, he worked on financial litigation matters with NERA Economic Consulting. Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Follow @maxgAIER.