American Staffing 2006

Annual Economic Analysis

"The Goldilocks Economy" headlined a July 2005 Wall Street Journal op-ed written by Ben S. Bernanke, then chairman of the President's Council of Economic Advisers, six months before his installation as Alan Greenspan's successor as chairman of the Federal Reserve Board. In the article, he weighed in on the debate among experts as to whether the economy was too hot or too cold. Upon reflection, he decided that it was just right.¹

Six months later—despite escalating fuel prices, rising interest rates, growing concerns about inflation and a housing-price bubble, plus two huge hurricanes, one of which wiped out a major U.S. city as well as Gulf of Mexico oil-industry facilities, further escalating already record-breaking fuel prices—that fairy tale sentiment popped up again, this time on Wall Street, and this time about the staffing industry:

Economic indicators for 2006 were pointing to a "Goldilocks environment," Harris Nesbitt analysts Jeffrey M. Silber and Avram Fisher wrote in January,² and would be just right for the staffing industry.

Many first-quarter indicators affirmed the view that the economy is neither too hot nor too cold. Analysts threw caution to the wind and declared that it was just about right. "The economy is continuing to look more sustainable than expected," said Wells Capital Management chief investment strategist James Paulsen.³

What makes this a "just right" economy? And what's that mean for the staffing industry?

The 2005 Economy

Real gross domestic product increased by 3.5% in 2005. That is certainly cooler than the hot rate of 4.2% in 2004 (a rate comparable to the boom years of the late 1990s). But last year's GDP growth rate was still above the historical average, even that of the past 15 years, according to the U.S. Bureau of Economic Analysis.⁴

Nonfarm employment increased by more than two million jobs in 2005, up half a million from the previous year, according to the U.S. Bureau of Labor Statistics. And new jobs continue to be added this year.⁵ Meanwhile, BLS reports, the unemployment rate declined by half a percentage point last year, from 5.4% in December 2004 to 4.9% in December 2005. The rate has fallen even further this year. In February, the rate was the lowest it had been in four years and well below the average of the past three decades.⁶

Productivity—output per hour of work—also remained strong in 2005. Last year's growth rate was 2.7%, significantly cooler than the scalding rate of 3.5% in 2004 and well off the blistering rates of the previous two years of economic recovery, which were the only successive years of annual growth rates at 4.0% or more in the history of productivity tracking at BLS.⁷

While productivity growth moderated in 2005, it was still well above the average annual rate of the 1990s: 2%.

"The faster productivity grows," Bernanke wrote in his op-ed, "the faster the economy can grow without inflation. Productivity growth over time leads to higher wages and standards of living. From 2001 through 2004, productivity growth in the U.S. averaged 3.7% per year, making this one of the strongest periods of productivity growth in modern U.S. history. Economists generally do not expect that very high rate to be maintained, with most forecasting a sustainable rate of productivity growth of about 2.5% per year. Even that rate would be quite impressive by historical standards."

The productivity proposition is simple: more output, less work. Ultimately, productivity creates prosperity. It can also reduce the demand for labor. The burst of productivity growth in the first half of this decade played a key role in the slow recovery of employment after the 2001 recession.

The Business Cycle Dating Committee of the National Bureau of Economic Research, a nongovernmental organization that is viewed by most economists as the arbiter of U.S. economic cycles, determined in 2003 that a recession occurred March to November 2001. With the U.S. employment slump extending well into 2003, some economists questioned whether NBER called the end too early. The criticism prompted the NBER committee to take the unusual step of issuing a statement to defend its dating of the 2001 recession. "Real GDP has risen substantially since November 2001," the statement said. "However, this growth in real GDP entirely took the form of productivity growth. As a result, the growth in real GDP has been accompanied by falling employment."⁸

Surges in productivity without corresponding increases in consumption yield surplus labor. From 2001 through 2003, productivity grew faster than the economy, as measured by GDP⁹ (see Figure 1). So businesses needed fewer workers to keep up with demand. Indeed, businesses could shed workers and still keep up with increased demand. Employment declined.¹⁰

Beginning in the second half of 2004 and continuing throughout 2005, the pace of economic growth slowed a bit while still maintaining an above average rate and—importantly—the productivity growth rate markedly declined, resulting in an accelerated expansion of overall employment and a reduction in the unemployment rate.

Moderating economic, productivity, and employment growth along with contained inflation¹¹ created a Goldilocks environment that America's staffing companies found just right for growth in 2005.

Staffing in 2005

America's staffing companies employed an average of 2.9 million temporary and contract workers per day in 2005 (see Figure 2), according to the American Staffing Association's quarterly employment and sales survey (see box on methodology). With the addition of an average of 234,000 jobs per day, staffing industry employment grew by 8.7%, marking the third consecutive year of strong growth and far surpassing the industry's previous average daily employment record of 2.7 million in 2000.¹²

The staffing industry also surpassed a notable threshold: three million jobs. In the fourth quarter, temporary and contract employment averaged 3.1 million per day.¹³

Over the course of 2005—taking into account the high turnover (over 300%) inherent with temporary and contract work—U.S. staffing firms hired 12.1 million employees (see Figure 3).¹⁴

More than 5.5 million—53% of those who remained in the work force—moved on to permanent jobs, based on an ASA staffing employee survey conducted in January and February 2006 among more than 13,000 then-current or former temporary and contract employees.¹⁵

While on any given day, the staffing industry employs just 2% of the U.S. work force, it has helped millions of families earn additional income as approximately one in 11 nonfarm workers had a job with a staffing company at some point last year.¹⁶

Nine out of 10 temporary and contract employees were satisfied with their staffing firm experience, ASA's 2006 staffing employee survey shows,¹⁷ which might explain in part why they stayed longer with their firms than in recent years, particularly given last year's strong job market. Turnover dropped to a historic low, from 360% in 2004 to 316% in 2005, thereby increasing average tenure from 11.3 weeks in 2004 to 12.5 weeks in 2005 (see Figure 4).¹⁸

U.S. temporary and contract staffing sales for 2005 totaled $69.5 billion, according to the ASA quarterly employment and sales survey, 8.5% more than in the previous year and about $4 billion more than the industry's prior high points in 2000 and 2004 (see Figure 5).¹⁹

Those sales include revenue from so-called "temp-to-perm" or "temp-to-hire" arrangements where employees start jobs as staffing firm employees and later get hired by customers. While these revenues account for less than 10% of total staffing industry sales, ASA received numerous anecdotal reports last year that such arrangements were rapidly growing in popularity, favored by candidates as well as customers.

In the permanent placement sector, Staffing Industry Analysts Inc. estimates that 2005 contingent search sales grew 25% to $6.7 billion and retained search sales increased by 11% to $5.7 billion.²⁰

Altogether, U.S. staffing industry sales totaled $81.9 billion in 2005, 10.5% more than in 2004 (see Figure 6) and three times last year's rate of growth for the overall economy.

The Flexibility Factor

The U.S. staffing industry is growing faster than the economy because of flexibility: workers want it, businesses need it, and it's good for the economy.

America's work force is changing. Many people are looking for flexibility in their employment arrangements. In ASA's 2006 staffing employee survey,²¹ two-thirds said flexible work time was an important factor in their decision to become a temporary or contract employee; nearly one-quarter of survey participants said it was an extremely important factor. More than half said needing time for family was important; one in five said it was extremely important.

Staffing employees may want flexibility, but they're also committed to putting in the hours. In the ASA survey, 79% worked full time (35 hours or more per week). By comparison, 83% of employees in traditional arrangements work full time, according to BLS.²²

With the experience of matching millions of people to millions of jobs, staffing companies are expert at finding work assignments in virtually all occupations, from day laborer to chief executive officer (see Figure 7). Assignments are shifting toward occupations that require higher levels of skills and education, according to the results of a series of surveys conducted by BLS.²³

Flexibility and access to talent drive business demand for staffing services.

In a 1999 American Management Association survey of human resource managers at 1,248 firms, 91% said "flexibility in staffing issues" was important, and 95% said that flexibility was being achieved, largely through the engagement of temporary and contract employees from staffing companies. "Finding specialized talent" was also important. Saving on payroll and benefits costs was a low priority.²⁴

In 2004, ASA polled 500 businesses that used staffing services. Nine out of 10 said it was important to them that "Staffing companies offer flexibility to businesses so that they can keep fully staffed during busy times." When survey participants were asked specifically why they use staffing firms to obtain temporary and contract employees, they cited three main reasons (see Figure 8):²⁵

• To fill in for absent employees or to fill a vacancy temporarily
• To provide extra support during busy times or seasons
• To staff special short-term projects

Besides flexibility, the ASA poll showed that businesses also look to staffing firms as a good source of talent for permanent employees. Regardless of whether they need the talent on a temporary, contract, or permanent basis, the ASA poll shows that businesses tap staffing companies for quality talent in virtually all occupational sectors,²⁶ from call center service representatives to skilled tradesmen to airplane pilots to banquet waiters to attorneys to radiology technicians (see Figure 9).

"Use of temporary or contract employees to smooth out labor needs has grown substantially," said Erica L. Groshen and Simon Potter, economists with the Federal Reserve Bank of New York.²⁷ "Uncertainty and financial headwinds likely constrain new job creation." After outlining the considerable obstacles employers must overcome to create new jobs, they argue that structural changes may be occurring in the economy because of management innovations that result in leaner staffing. "Firms increasingly hire temporary help when they are busiest and then cut back when demand falls."

Companies that embrace work force flexibility and engage staffing firm talent do better economically. "Increased reliance on contingent (i.e., temporary/part-time) labor…is associated with superior subsequent performance…[and] no increase in systematic risk," concluded a study published in Decision Sciences journal. Economists Nandkumar Nayar of Lehigh University and G. Lee Willinger of the University of Oklahoma compared firms in a carefully constructed sample and found that earnings (before interest, taxes, depreciation, and amortization), gross margins, and stock returns improved after the increased use of this labor practice.²⁸

The larger the company, the more likely it is to use staffing services, according to various surveys. In ASA's staffing customer poll, 12% of companies with 25 to 99 employees used staffing services, compared with 24% of companies with 100 or more employees (see Figure 10).²⁹ A survey of Conference Board members—mostly global companies—found that 90% use staffing services.³⁰ And a survey of large employers in San Diego found that 95% use staffing services.³¹

Flexibility: not only do workers want it and not only do businesses need it, it is also good for the economy.

Alan Greenspan, former chairman of the Federal Reserve Board, spoke frequently—especially since 2001—about the importance of financial and labor market flexibility to the U.S. economy. In July 2005, in testimony delivering his last Monetary Policy Report to Congress, he concluded his remarks by emphasizing the notion once again: "Openness and flexibility have allowed us [the United States] to absorb a succession of large shocks in recent years with only minimal economic disruption. That flexibility is, in large measure, a testament to the industry and resourcefulness of our workers and businesses."³²

Labor market flexibility helps create jobs, economists say. A study published by the Employment Policies Institute determined that "the temporary help industry helped to increase employment in manufacturing by allowing firms to expand their labor forces in the face of uncertain demand conditions." While BLS reported an increase of 570,000 manufacturing jobs from 1992 to 1997, EPI estimated that manufacturing employment actually increased by 1,075,000. Temporary help workers accounted for the difference—about half a million jobs. In the absence of a flexible staffing alternative, the study concluded, manufacturers would not have hired aggressively in response to rapid increases in demand.³³

The administrations of presidents Bill Clinton³⁴ and George W. Bush³⁵ have both cited the staffing industry as an important contributing factor in creating jobs and reducing unemployment.

Economists Lawrence Katz of Harvard University and Alan Krueger of Princeton University studied the dramatic drop in the unemployment rate in the 1990s. They concluded that the growth of the staffing industry was responsible for up to 40% of the reduction in the unemployment rate.³⁶ They argued that staffing firms, as labor market intermediaries, improve the efficiency of matching workers to jobs.

The growth of temporary help employment corresponds with the overall long-term declining trend in the unemployment rate (see Figure 11). The 10-year average unemployment rate has been falling for more than 20 years, and the unemployment rate peaks following recessions have been lower and the troughs in expansions have been shallower, suggesting underlying strength and durability of the economy, according to David Malpass, chief global economist at Bear Stearns.³⁷

Staffing firms provide immediate employment—and (taxable) real income—for workers and, for those seeking permanent jobs, a bridge to that end. In ASA's 2006 staffing employee survey,³⁸ six in 10 respondents said they took a temporary or contract job as a way to get a permanent job. And a majority said temporary or contract work made them more employable because they could develop new or improve their work skills, gain on-the-job experience, and strengthen their résumé.

A large majority rate their experience positively: 88% said they would refer a friend or relative to work as a temporary or contract employee.

Jobs, flexibility, bridge to permanent employment, choice of alternative employment arrangements, and training—these are the benefits staffing firms offer to today's workers. Flexibility and access to talent—these are the benefits staffing firms bring to business customers. And jobs, labor market flexibility, efficient bridging to permanent jobs, and training—these are the benefits staffing firms bring to the economy.

Outlook

The U.S. staffing industry will grow faster and add more new jobs over the next decade than just about any other industry, according to BLS estimates. In its most recent projections, BLS says that the employment services industry—which is primarily staffing—will grow at an average annual rate of 3.8% from 2004 to 2014, adding nearly 1.6 million new jobs.³⁹

On the agency's list of the top 10 detailed industries expected to have the largest job growth, employment services ranks first in terms of number of jobs and third in terms of growth rate (see Figure 12).

"The catalyst for [the employment services] industry's growth will be increases in the demand for temporary staffing services as flexible work arrangements and schedules continue to proliferate and businesses make their staffing patterns more responsive to market changes," wrote BLS economist Jay M. Berman in the November 2005 Monthly Labor Review.⁴⁰

Employment in office and administrative support occupations is expected to grow more slowly than overall employment, in part because of "the greater use that organizations make of temporary workers employed by the employment services industry."

In the industrial sector, BLS projects growth in construction jobs will offset a decline in manufacturing employment. "One-eighth of the new jobs [in construction]—and the fastest growth—is expected to be in the employment services industry." While BLS estimates that manufacturing jobs will decline by more than 750,000 jobs, which is one-quarter the rate of the previous decade, Berman notes nonetheless that production "employment is projected to grow by nearly a quarter of a million in the employment services industry, which provides employees to other industries on a contract or fee basis."

As for other sectors, Berman says, "Nearly 25% of all new jobs will be in the professional, scientific, and technical services sector, which includes management, scientific, and technical consulting; and accounting, tax preparation, bookkeeping, and payroll services." About 20% of new jobs are expected to be in health care. Other leading growth sectors include education (especially at colleges) and government (mostly local).

Berman also noted that "Legislation and court rulings setting standards in occupational safety and health, equal employment opportunity, wages, health care, pensions, and family leave will increase demand for employment, recruitment, and placement specialists." Because staffing professionals are already well-versed in employment law—and ASA members are kept abreast of new developments—organizations can turn to staffing companies to access specialists with that expertise.

Among the 10 major occupational groups tracked by BLS, employment in the two largest in 2004—professional and related occupations and service occupations—will increase the fastest and add the most jobs through 2014. Just these two groups are expected to account for almost 60% of the total job growth in that period, said Norman C. Saunders, the BLS economist who oversees the agency's projections.⁴¹ But the two groups, he noted, are also on opposite ends of the educational attainment and earnings spectrum.

It's important to consider the key assumptions BLS made in developing these projections: the economy will continue to grow at a strong pace, though a little slower; inflation will be restrained; productivity growth will moderate closer to historical norms; the unemployment rate will remain steady at about 5%; and both the U.S. population and work force will grow at an annual rate of 1%.

These assumptions are important because their indicators were headed in this direction when Ben Bernanke's "Goldilocks" op-ed ran last summer, and it's where the economy was headed in the first quarter of this year, when Harris Nesbitt's Jeff Silber glowed about Goldilocks too.

Moderating employment growth in the staffing industry "may actually be a good thing," Silber says, because it suggests overall employment growth may slow, which would "temper unemployment rates and keep labor markets from getting too tight."⁴² While a falling unemployment rate may boost demand for staffing and recruiting services, when it falls below 4.5%, he says, the labor market becomes too tight and growth of the staffing industry is constrained by lack of supply.

To be sure, ASA data show that the staffing industry employment growth rate dropped from double digits in 1997 to the low single digits in 1998⁴³ when, BLS data show, the U.S. unemployment rate fell into the 4.3% to 4.6% range.⁴⁴

Assuming GDP of mid- to low 3% and an unemployment rate of 5%, Silber is projecting temporary staffing employment growth of 4% to 6% and revenue growth of 7% to 9% in 2006.⁴⁵ Staffing Industry Analysts Inc. estimates that temporary help revenues will grow 9% in 2006, and search and placement revenues will grow 22%.⁴⁶

These growth rates are slightly lower than 2005's. But they are more than double the expected rate of overall economic growth.

Goldilocks economy or not, what worries America's staffing professionals most is finding qualified employees to meet their customers' needs. Both already see skill shortages. This poses clear challenges—but also exciting opportunities—for an industry that specializes in finding the best talent for businesses.

Notes

1. Ben S. Bernanke, "The Goldilocks Economy," Wall Street Journal, July 27, 2005, Opinion page. (return)
2. Jeffrey M. Silber and Avram Fisher, "The Staffing Indicator," Harris Nesbitt, January 2006. (return)
3. Anjali Cordeiro, "Russell 2000 Hits Record High; Eagle Materials, OpenTV Climb," Wall Street Journal, March 16, 2006. (return)
4. Bureau of Economic Analysis, U.S. Department of Commerce, "Gross Domestic Product: Fourth Quarter 2005 (Preliminary)," News Release, Feb. 28, 2006. (return)
5. Bureau of Labor Statistics, U.S. Department of Labor, "Employment, Hours, and Earnings From the Current Employment Statistics survey (National)," Web Site Public Data Query, Series ID: CEU0000000001, March 24, 2006. (return)
6. Bureau of Labor Statistics, U.S. Department of Labor, "Labor Force Statistics from the Current Population Survey," Web Site Public Data Query, Series ID: LNS14000000, March 24, 2006. (return)
7. Bureau of Labor Statistics, U.S. Department of Labor, "Major Sector Productivity and Costs Index," Web Site Public Data Query, Series ID: PRS84006091, March 24, 2005. (return)
8. Business Cycle Dating Committee, National Bureau of Economic Research, "The NBER's Business-Cycle Dating Procedure," Oct. 21, 2003. (return)
9. Ibid 7, 4. (return)
10. Bureau of Labor Statistics, U.S. Department of Labor, "Employment, Hours, and Earnings from the Current Employment Statistics Survey (National)," Web Site Public Data Query, Series ID: CES0000000081, March 25, 2006. (return)
11. Council of Economic Advisers, Economic Report of the President (Washington: United States Government Printing Office, 2006). (return)
12. American Staffing Association, "Employment and Sales Survey Report, Fourth Quarter 2005," Feb. 27, 2006, a proprietary report for survey participants only. Public data available online at americanstaffing.net; click on Staffing Statistics. (return)
13. Ibid. (return)
14. Ibid. (return)
15. Steven P. Berchem, "A Profile of Temporary and Contract Employees: Who They Are and What They Do," American Staffing Association, 2006, forthcoming. (return)
16. Calculated using ASA's figure for temporary staffing employment (2.9 million and 12.1 million, Ibid 12) and BLS's figure for total nonfarm employment (133.5 million, Ibid 5). (return)
17. Ibid 15. (return)
18. Ibid 12. (return)
19. Ibid 12. (return)
20. Staffing Industry Analysts Inc., Staffing Industry Report, Feb. 24, 2006. (return)
21. Ibid 15. (return)
22. Bureau of Labor Statistics, U.S. Department of Labor, "Contingent and Alternative Employment Arrangements, February 2005," News Release, July 27, 2005. (return)
23. American Staffing Association analysis of unpublished data from the Bureau of Labor Statistics, U.S. Department of Labor. Data were from the contingent and alternative employment arrangement supplement to the Current Population Survey conducted in February 1995, 1997, 1999, and 2001. The supplemental survey was not conducted in 2003; it was resumed in 2005. The occupational distribution of the 2005 sample skewed contrary to trends evident from the first four surveys. The survey may be subject to errors related to the relatively small sample ("temporary help agency workers" n = 344 and "workers provided by contract firms" n = 240) compounded by projecting that sample to represent nearly 200 occupations over an estimated population of two million. Given the skewing of the 2005 results, data from the next most recent survey (2001) were used in Figure 11. (return)
24. American Management Association, "1999 AMA Survey, Contingent Workers, Summary of Findings." (return)
25. Steven P. Berchem, "Flexibility and Talent: Top Assets—Staffing Industry Gets Good Ratings in National Poll of Businesses," Staffing Success, May–June 2005, American Staffing Association. (return)
26. Ibid. (return)
27. Erica L. Groshen and Simon Potter, "Has Structural Change Contributed to a Jobless Recovery?" Current Issues in Economics and Finance, Federal Reserve Bank of New York, August 2003. (return)
28. Nandkumar Nayar and G. Lee Willinger, "Financial Implications of the Decision to Increase Reliance on Contingent Labor," Decision Sciences, Vol. 32, No. 4, Fall 2001. (return)
29. Steven P. Berchem, "Rebound," Staffing Success, May–June 2003, American Staffing Association. (return)
30. "Contingent Employment," HR Executive Review, Vol. 3, No. 2, The Conference Board, 1995. (return)
31. Gianpaolo Baiocchi, Sundari Baru, and Paula Chakravartty, "Just Getting By: The Experience of Temporary Workers in San Diego's Economy," Center on Policy Initiatives, October 2002. (return)
32. Testimony of Chairman Alan Greenspan, Federal Reserve Board's semiannual Monetary Policy Report to the Congress, Before the Committee on Financial Services, U.S. House of Representatives, July 20, 2005. (return)
33. Marcello Estevao and Saul Lach, "Measuring Temporary Labor Outsourcing in U.S. Manufacturing," Employment Policies Institute, November 2001. (return)
34. Council of Economic Advisers, Economic Report of the President, (Washington: United States Government Printing Office, 2001). (return)
35. Council of Economic Advisers, Economic Report of the President, (Washington: United States Government Printing Office, 2004). (return)
36. Lawrence F. Katz and Alan B. Krueger, "The High-Pressure U.S. Labor Market of the 1990s," Working Paper #416, Princeton University, May 1999. (return)
37. David Malpass, "Jobs, Jobs, Jobs," Wall Street Journal, April 6, 2004, Commentary. (return)
38. Ibid 15. (return)
39. Bureau of Labor Statistics, U.S. Department of Labor, "BLS Releases 2004–14 Employment Projections," News Release, Dec. 7, 2005. (return)
40. Jay M. Berman, "Industry Output and Employment Projections to 2014," Monthly Labor Review, November 2005, Bureau of Labor Statistics, U.S. Department of Labor. (return)
41. Norman C. Saunders, "A Summary of BLS Projections to 2014," Monthly Labor Review, November 2005, Bureau of Labor Statistics, U.S. Department of Labor. (return)
42. Ibid 2. (return)
43. Ibid 12. (return)
44. Ibid 6. (return)
45. Ibid 2 and March 10, 2006, e-mail from Jeff Silber to staffing industry investors commenting on BLS's employment situation for February. (return)
46. Ibid 20. (return)