The Role of Temporary Agency Employment in Tight Labor Markets

Abstract

The authors use case study evidence from hospitals and auto parts manufacturers to investigate why employers used—and even increased their use of—temporary help agencies during a period of tight labor markets in the 1990s. In high-skill occupations, the evidence suggests employers paid substantially more to agency help than to regular employees in large part to gain additional time to recruit employees for permanent positions and thereby avoid raising wages for new hires and existing employees. In low-skill occupations, temporary help agencies appear to have facilitated the use of more “risky” workers by lowering their wages and benefits and the costs associated with turnover. As in high-skill occupations, the use of agency temporaries in low-skill occupations relieved pressure on companies facing tight labor markets to raise employees' wages, and may have contributed to the stagnant wage growth and low unemployment observed in the 1990s.