Productivity Benefits of Employing Temps

Having roughly one in ten of a firm''s staff as temps seems to be the ideal share for maximising productivity. That is the central finding of research by Dr Boris Hirsch and Dr Steffen Mueller, published in the August 2012 issue of the Economic Journal.

Their study finds that employing temporary agency workers increases the average productivity of firms by up to 14%. But these positive effects on productivity are absent once the share of temps in the firm''s workforce becomes too high – more than 20%.

In recent years, there has been a great deal of controversy about whether using temps is merely a low-road strategy for bidding down labour costs (with negative consequences for labour relations) or whether it is a productivity-increasing instrument to meet firms'' need for greater flexibility. The study contributes to this debate by investigating the effect of temporary agency work on firms'' productivity using representative data on German plants for the years 2003-09.

The central finding is that firms with a moderate share of temps in their workforce gain in productivity. The positive effect peaks at a temp share of 11%, yielding a productivity advantage of 14% relative to firms that don''t employ temps.

Nearly nine out of every ten temp-using firms in the sample report flexibility requirements – such as the fast availability of temps or temporary peaks in product demand – as their most important reason for using them. This suggests that increased flexibility is the driving force behind the productivity gains.

But heavy users with a temp share of 20% or more of the workforce are no more productive than non-users. This may be because temps are often less qualified than more experienced permanent employees and because permanent employees'' morale may suffer from employing large numbers of temps. Consequently, using large numbers of temps may offset the productivity gains from increased flexibility.

Previous research has found that some firms use temps to achieve cost reductions, so it may be that heavy users more than make up for lost productivity gains through lower labour costs. Put differently, heavy users may employ temps as part of a low-road strategy of bidding down labour costs to the detriment of their productivity.

Yet the new study shows that only about 3.5% of user firms are heavy users with temp shares of 20% or more. What''s more, only a third of heavy users in a given year remain heavy users in the following year. This suggests that high use of temps is usually a temporary rather than a strategic phenomenon.

These findings shed new light on the massive deregulation of temporary agency work observed in many countries in recent years. In Germany with its highly regulated labour market, the most recent deregulation in 2003 was followed by large increases in both the number of user firms and the number of temps in user firms.

As Hirsch and Mueller find, the vast majority of user firms increase their productivity through temporary agency work, which is likely to reflect gains in flexibility following the use of temps. Whereas this points to aggregate efficiency gains for the German economy, future research may broaden the picture by exploring the effect of temporary agency work on workers and labour relations.

''The Productivity Effect of Temporary Agency Work: Evidence from German Panel Data'' by Boris Hirsch and Steffen Mueller is published in the August 2012 issue of the Economic Journal.

Media Coverage

Vox Temporary employment: The trade-off between efficiency and equity