Atypical work and pay.

• Author: Addison, John T.
• Position: Alternative work arrangements, compensation levels

1. Introduction

   Even as the economy continues to recover, the U.S. is increasingly becoming a nation of part-timers and free-lancers, of temps and independent contractors. This "disposable" labor force is the most important trend in business today, and it is fundamentally changing the relationship between Americans and their jobs. For companies large and small, the phenomenon provides a way to remain globally competitive while avoiding the vagaries of market cycles ... But for workers, it can mean an end to security and sense of significance that come from being a loyal employee. One by one, the tangible bonds that once defined work in America are giving way. Castro (1993, p. 43.) The frequency of alternative work arrangements such as temporary employment, on-call work, and independent contracting--nonstandard forms of employment commonly referred to as "atypical work"--has steadily increased in recent decades (see, for example, Segal and Sullivan 1997). Research on atypical work/alternative work arrangements--we shall use the two terms interchangeably--has tended to focus on the nature and extent of these arrangements and their impact on a worker's employment history (e.g., Addison and Surfield 2006). Although compensation levels have been accorded less attention, the thrust of much of the earnings literature is pessimistic: Compared with regular or open-ended employment, alternative work arrangements often appear to offer inferior remuneration. The public perception remains that workers in these alternative work arrangements constitute a disposable workforce characterized by low-paying and precarious or unstable jobs.

   Abstracting for the moment from the complications introduced by the diversity of alternative work arrangements, there are a number of reasons why their incumbents might earn less than regular workers. For example, wage differentials between atypical workers and those in open-ended employment can arise from supply-side differences among heterogeneous workers and employer preferences. On the supply side, a subset of workers may favor nonstandard work forms over regular employment, and be prepared to accept lower pay. One example would be adults who are heavily involved in household production, and another is older workers who have moved out of career jobs. But supply-side differences alone are insufficient to sustain a permanent ceteris paribus differential in favor of regular workers. In addition, atypical workers and regular workers must not be fully fungible and employers must not be indifferent between them.

   Negative wage gaps for atypical work are not the only possibility admitted by the competitive model. Atypical workers may earn higher wages than their counterparts in regular employment if the aggregate demand for these nonstandard arrangements is greater than the number of individuals seeking such employment. Thus, to adapt Hirsch's (2005, p. 527) argument in respect of part-timers, if firms use atypical work as low-cost means of adjusting to variable and uncertain demand, the relatively large supply of atypical workers required may run up against mobility or substitution constraints--across labor markets delineated by geography, occupation, and industry--and give rise to positive equilibrium wage gaps for atypical workers.

   Negative wage gaps may of course also be more apparent than real. For example, worker ability and employment in an alternative work arrangement might be negatively correlated. In this case, an unfavorable wage gap will be attributable not to type of work arrangement but, rather, to lesser ability. We would certainly like to control for ability so as to avoid drawing faulty inferences about earnings and work arrangement in the presence of such sorting behavior on the part of low-ability individuals.

   This pattern of negative and positive wage gaps may largely reflect the nature of temporary work. Consider first agency temporaries, namely, workers paid by a temporary help agency. Such workers are typically hired by a client firm where the work is expected to be temporary or is of uncertain duration. Companies may find it cost-effective to hire such workers, even if they are of lesser productivity than regular workers, because they are less costly to terminate (Autor 2003). They may thus form a buffer stock. It is likely that the employment of both agency temps and another type of atypical worker, direct-hire temporaries, will increase relative to regular employment in an expansion. In addition, companies may use agency temps to fill vacancies until permanent hires are made and, in some cases, to recruit permanent workers from the ranks of the agency workers themselves. In the latter case, for those choosing to take a low-paid agency job to queue for regular employment, we will observe a negative equilibrium wage gap. Temporary help agencies probably enjoy scale economies in recruiting and screening of temporary and permanent workers. They pool jobs across companies and can provide workers with a better selection of schedules than can any company acting on its own, while offering employment continuity (albeit with the agency). Similar considerations apply with respect to permanent positions, especially in tight labor markets. Tightening labor markets also encourage the substitution of agency workers for in-house, on-call worker pools and the direct-hire temporaries.

   Why might companies pay agency temporaries less than regular workers, that is, discriminate in favor of the latter? (1) In a labor market consisting of good and risky workers (who may be either good or bad but share poor work histories), firms will be wary of offering permanent contracts to workers who may turn out to be lemons. The firm's choice of the two types of worker depends on the costs per unit of output for each type. Houseman, Kalleberg, and Erickcek (2003) argue that temporary agencies can reduce the costs to firms of hiring risky workers, and may be a more efficient solution to the informational problem than the probationary contract. For example, if agencies are more adept at screening and matching workers, their use raises the probability that the worker will prove suitable--and cheaper to hire and fire if unsuitable (Booth, Francesconi, and Frank 2002). The use by the client company of agencies to hire risky workers allows it to expand the supply of labor and deflect the need to raise wages for new and incumbent workers.

   Again, it is not automatically the case that temporary agency workers will experience lower wages. For example, in the recovery phase a firm will have to pay higher wages to new hires. The higher wages may be generalized throughout the workforce to avoid adverse morale and productivity effects. This threat may be deflected through hiring the new workers, who make more money than the rest, through agencies. On the assumption that agency workers and regular workers are homogeneous, Houseman, Kalleberg, and Erickcek (2003) show that employers may discriminate in favor of agency workers, thereby raising the wages of new entrants without raising the wages of existing employees. The maintained hypothesis is that regular workers are, for a variety of reasons, less knowledgeable about agency temps' wages than they are of other workers' wage levels.

   These arguments suggest that temporary agency workers can earn both negative and positive wage differentials. As a practical matter, however, it seems likely that agency temporaries will be less likely to enjoy a premium (and more likely to experience a negative differential) because of their less favorable skill composition than other atypical worker groups, such as contracting company employees (and independent contractors). For example, in their study of hospital use of agency temporaries, Houseman, Kalleberg, and Erickcek (2003, p. 111) find that the cases in which companies use temporary workers to buy time to recruit permanent employees at lower wages are precisely those "where workers must meet clear educational or certification requirements to perform jobs and where the costs of having an unqualified person staff a position are high."

   Small and medium-sized firms will contract with outside 'knowledge workers' because it is not cost-effective to provide the service in-house. For example, economies of scale in the provision of, say, computer support activities might lead the firm to rely on the resources and experience of a computer services contracting company (Abraham and Taylor 1996). It has also been argued that client companies of company contract workers will also include those who are "unable or unwilling to satisfy the demands of knowledge workers for increased control over their work," both in terms of its execution and timing, leading such workers to turn to atypical contracting arrangements (Forde and Slater, 2005, p. 254). Expert workers in such high-skill professional, managerial, scientific, and technical occupations may be expected to earn higher wages than the generality of regular workers by virtue of their greater skill endowments. It is not clear that they will enjoy an additional premium, outside of the situation discussed earlier, and situations in which companies are using higher-priced contract workers to buy themselves time to recruit regular workers and hence discriminate in favor of these atypical workers. That said, in cases where the skills of contract workers considerably exceed those of regular workers, it is likely that a positive ceteris paribus wage gap will be recorded, especially in circumstances where, as here, we are not controlling for fringes.

   The main contribution of the present paper is to estimate wage differences for the full set of alternative work arrangements while simultaneously controlling for observed demographic characteristics and unobserved person-specific fixed effects. The wage gaps that we identify are the starting point for separate lines of inquiry. We justify our...