Labor market intermediation: what it is, why it is growing, and where it is going.

• Author: Autor, David
• Position: Research Summaries

Two developments--one institutional, one technological--are changing how employers identify, evaluate, and select job candidates. The institutional change is the rapid diffusion of "non-standard" work relationships in the United States and the OECD--particularly temporary help employment--through which firms employ workers at arms length and frequently audition them for direct hire positions.

The technological change is the deployment of electronic candidate assessment systems, which screen and vet job applicants using personality tests and online background checks. Both developments underscore the growing importance of "labor market intermediation"--mechanisms or institutions that intercede between job seekers and employers. A major strand of my research concerns the growth of labor market intermediation: how it affects the way workers seek jobs, who is hired, and potentially what consequences follow. Here, I describe several recent NBER papers that explore these questions.

Why is Temporary Help Employment Growing?

Although temporary help firms have supplied workers to U.S. businesses since the 1940s, only relatively recently has the industry's, explosive growth brought it sustained national attention. From 1972 to 2000, employment in the temporary help industry increased five times more rapidly than employment economy-wide. The U.S. economy produced a record number of new jobs in the 1990s, and the temporary help industry laid claim to fully 10 percent of all of this job creation. At their peak in 2000, temporary help agencies accounted for almost 3 percent of U.S. daily employment. This growth has not been limited to the United States. In virtually all OECD countries, temporary help employment surged in the last decade. (1) Why is temporary help employment growing so rapidly?

In "Outsourcing at Will," (2) I show that one key explanation is the rising risk of wrongful-discharge litigation faced by U.S. employers--what many Europeans would call employment protection. Uniquely in the industrialized world, the United States has long had the legal presumption that workers can be fired "at will"--that is, "for good cause or for no cause, or even for bad cause," to quote a famous 1884 Tennessee Supreme Court Decision. During the 1970s and 1980s, this presumption eroded rapidly: most U.S. state courts created several classes of common-law restrictions that limited employers' ability to fire. These exceptions generated both costly litigation and substantial uncertainty among employers about when workers could be terminated with impunity. I assess whether the adoption of wrongful-discharge laws by U.S. state courts in part can explain the rapid growth of temporary help employment.

Why would wrongful-discharge laws increase demand for temporary help workers? If temporary help firms operate under the same firing strictures as direct-hire employers, these laws should not differentially affect temporary help employment. As discussed in the paper, however, temporary help firms are quite unlikely to fall afoul of wrongful-discharge laws. By their nature, temporary help jobs are understood by workers and by the courts to offer no employment security. Moreover, temporary agencies can readily, "fire" a worker simply by ending her current assignment and not providing a replacement. A worker is particularly unlikely to litigate if she is unaware that she has been terminated. These factors provide temporary help employers with a comparative advantage in terminating workers in states offering wrongful-discharge protections.

To evaluate this hypothesis, I contrast the growth of temporary help employment in states adopting wrongful-discharge laws to those not adopting wrongful-discharge laws in the contemporaneous time period. I find that these laws increased the incidence of temporary help employment. (13) In the year following adoption, states adopting wrongful-discharge laws saw 13 percent excess growth of temporary help employment (on average). Within four years, this impact rose to 24 percent. In net, I estimate that...