Against the backdrop of the recent tax debate which came to an end when President Obama signed a temporary extension of tax cuts into law for the next two years, job growth is sure to be under close scrutiny as both parties hope that the official unemployment of 9.8 percent will drop significantly in the new year. Both parties may be in for a rude awakening when they realize that a temporary tax deal may only spur temporary jobs.
The New York Times features an article on the rise of temporary jobs in the U.S. economy that has several insights into this recent phenomena:
This year, companies have hired temporary workers in significant numbers. In November, they accounted for 80 percent of the 50,000 jobs added by private sector employers, according to the Labor Department. Since the beginning of the year, employers have added a net 307,000 temporary workers, more than a quarter of the 1.17 million private sector jobs added in total.
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Flexibility is another factor. Corporate executives, stung by the depth of the recent downturn, are looking to make it easier to hire and fire workers. And with the cost of health and retirement benefits running high, many companies are looking to reduce that burden. In some cases, companies wrongly classify regular employees as temporary or contract workers in order to save on benefit costs and taxes.
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Of course, businesses that can now hire talented workers for temporary jobs may find that when demand picks up, they will need to offer full-time positions with perks and benefits. But it could take a long time to reach that point.
Temporary employment is a rising phenomena as employers seek to reduce labor costs, in the face of increasing mandatory benefits. As the government mandates that employers provide more and more benefits, such as comprehensive health insurance coverage or paid time off from work, employers in industries that can accommodate a temporary workforce will increasingly do so. When unemployment is high, workers have fewer alternatives to choose from and they often prefer take a lower paying temporary job with no benefits to being unemployed. Unless they’re able to take advantage of extended unemployment benefits, in which case they may forgo a temporary job in order to seek a better paying permanent job.
Germany which features a much more extensive social safety net and also mandates many more worker benefits than the U.S. has been struggling with high unemployment rates for quite some time. The country has seen a steep increase in temporary employment over the years, although temp jobs pay only about 40 percent of the salary workers would receive in full-time employment.
There is hope, however, that the rise in temporary jobs is an indicator that the economy is picking up again. Gad Levanon, Senior Economist of the Conference Board finds:
Firms tend to let go of temporary workers before permanent ones as the economy weakens, and to hire temporary workers before permanent ones as they cautiously test a strengthening economy. This component is highly correlated with employment and tends to lead before peaks.
It is unclear whether the temporary tax extensions will have much impact on spurring job growth. While the certainty over tax rates for the next two years helps many employers plan for the near future, business and job expansion often requires long-term planning over 5 to 7 years into the future. The temporary nature of the tax deal creates much uncertainty for U.S. employers, who now face a temporary tax regime. More likely, if we are to see a significant drop in the unemployment rate next year it will be because the economy has recovered from the recession and economic growth has picked up again. Nevertheless, politicians in Washington will be sure to claim the credit.