Commentary

Temporary Services, Permanent Benefits

By Brad Lips
July 28, 1998

As Washington uncorks champagne bottles to celebrate the likely budget surplus of 1998, it has the audacity to host a public spanking of Bill Gates, who may have done more than anyone else to unleash the Information Age economic boom. Conventional wisdom in the nation’s capital has also identified health maintenance organizations as fair game for rhetorical attacks and regulatory straitjackets. Never mind that these companies damped medical inflation in the 1990s, which helped to contain costs, improve corporate earnings and send the stock market to a height unthinkable five years ago.

Let us identify one more economic hero before Washington accuses it of villainy. The temporary staffing industry has significantly enhanced the competitiveness of U.S. firms by providing labor on a “just-in-time” basis. Your average MBA knows that firms should concentrate on the activities that win them business and keep everything else to a minimum. But what do you do when you need someone to build a database in a pinch? Or when you want an accountant at tax time? Or when your receptionist quits and you just need someone to answer the phones? In those situations, temporary staffing companies, like Manpower and Kelly Services, come to the rescue.

Labor unions and their political allies have issued alarmist warnings that the United States is turning into a nation of involuntary temps. In fact, however, the for-profit staffing industry would disappear if it weren’t providing value to the temps themselves. It functions as an intermediary in the labor market, matching employers and employees just like buyers and sellers are matched on the trading floor.


The for-profit staffing industry would disappear if it weren’t providing value to the temps themselves.


During tight labor markets, staffing firms also must compete vigorously against one another to attract and maintain workers. That is one of the factors that has led to an increase in the average hourly wage of temps (up to $10.11 in 1997 from $7.56 in 1994) and to more temp companies offering health benefits and even 401(k) plans.

Of course, temps do have lower-than-average levels of health benefits and overall compensation. But this is unsurprising, since they also tend to be younger and have less work experience. Moreover, since the average tenure of a temp is three to four months, many do not place a high priority on maximizing benefits in what they likely view as an interim position.

Few temporary employees remain “stuck” in their positions over the long term. Quite the contrary, temps are often entrants to the labor market looking to learn new skills, gain job references and earn some cash in the interim. Often, temporary staffing firms sponsor free optional training sessions on computer software applications, knowing that companies will pay more for higher-skilled workers. Raising skill levels of employees is another way that temp help firms serve the public interest. Richard Belous of the Economic Policy Institute has credited staffing companies with doing “more to train inner-city residents than all the government training programs combined.”

As Nobel laureate Friedrich Hayek has noted, free markets create “spontaneous order” among people with seemingly divergent interests. Employers have work to get done, but they want to avoid a tedious hiring process, keep their organization lean with low fixed costs and pay only the going market rate for each hour of labor. Workers want to quickly procure a job, increase their future value in the labor market and earn as high a wage as possible. Staffing companies earn their profits by creating a clearinghouse where both parties can feel assured that they are getting a fair deal.

In contrast, labor unions fight only for the interests of their members, not the average worker looking for his first job. Unions operate as a cartel, attempting to monopolize the selling of labor in certain industries or at an individual company. They suppress competition from outsiders and make demands on employers that may even be injurious to the long-term viability of jobs at the company. Witness, for example, the declines in market share — and therefore, the slowing of job creation — at UPS after last year’s strike.

For-profit staffing companies are much more compatible with the realities of the Information Age economy and with the ideals of a free society. Given the state of political gamesmanship in Washington — and the go-ahead received by unions in California to spend members’ dues on political ads without their consent — it won’t be surprising if staffing companies are the next big government scapegoat.

Brad Lips is a management fellow at the Atlas Economic Research Foundation. A longer version of this article appears in the new issue of the Cato Institute’s Regulation magazine.