After nearly 25 years of astronomical growth and a hiring frenzy during the pandemic, the technology jobs market is resetting. The reset started slowly, with post-pandemic adjustments that resulted in some layoffs, but has accelerated since. With more than 70,000 layoffs in 2024 already, it’s clear that tech companies aren’t done “rightsizing” their workforces.
Technology companies should approach this reset carefully and take advantage of a time-tested solution to their problem: temporary and contract work, which provides cost savings and greater flexibility in times of uncertainty. Instead, they have hired fewer contingent workers over the past two years.
The question is, why?
Temporary work has long played a crucial role in the U.S., offering workers flexible employment options and opportunities to develop essential skills. For employers, temp labor provides the ability to scale workforces up and down rapidly in response to changing market conditions, enabling them to support immediate needs without increasing fixed labor costs. In contrast, permanent employees are a long-term investment, generally more expensive to hire, onboard, train, manage, and replace than temporary or contract workers. This critical aspect of low-cost flexibility has cemented temps as a small but significant portion of the American labor force, ranging from about 1.5% to just over 2% of nonfarm employment since the mid-1990s.
Historically, the temp labor penetration rate—the percentage of total employment classified as “temporary help” by the Bureau of Labor Statistics (BLS)—has been a reliable indicator of economic trends. Typically, this rate rises during periods of strong GDP growth and low unemployment, as employers use more temps to scale their workforces rapidly in a tight labor market, then falls during economic slowdowns as companies protect their investment in full-time employees.
However, something unprecedented has occurred over the past two years. Temp penetration peaked at just over 2% in March 2022 but then declined steadily to 1.7% by May 2024, despite the economy growing by over 3% annually and unemployment remaining below 4%. This decline defies historical patterns and limits businesses’ ability to quickly respond to new opportunities and threats.
In the 34 years of available data, there has never been a sustained drop in the temp penetration rate without the economy tipping into recession. Yet not only is the U.S. economy growing but experts are now predicting the country will likely avoid a recession altogether, achieving a so-called “soft landing” of successfully taming inflation rates without a significant slowdown in GDP growth or high unemployment.
Staffing executives have struggled to explain this disconnect. Some suggest it results from a natural labor demand correction after companies over-hired in the immediate post-pandemic period, while others point to a recent jump in labor productivity. However, these explanations do not fully account for why temp employment specifically fell, even as the private sector added nearly three million jobs.
Instead, elevated anxiety is a stronger candidate to explain the shift. various geopolitical conflicts, a wave of layoffs in the tech sector, a narrowly-averted banking crisis, and other sources of volatility, corporate decision-makers have struggled with prolonged uncertainty about the near future. When companies perceive increased short-term risk, they may prioritize long-term hires over temps, much like an inverted yield curve in bond markets. This dynamic can become self-reinforcing: as companies reduce their use of temps, macroeconomic forecasts become more pessimistic, further driving down temp employment in a positive feedback loop.
Data show that temp penetration rates are more closely (inversely) correlated with the Anxious Index—a measure of perceived recession risk—than with actual GDP growth. When companies fear an impending downturn, they stop hiring temps, even if long-term growth prospects remain strong. This decline in temp labor usage has left companies in a risky position, with reduced workforce flexibility and higher fixed labor costs.
Some might argue that high-skill tech openings can’t be easily filled by contingent workers, and that HR departments often can’t spend the months and money it would take to find the right person. Staffing agencies are the solution to this challenge because they are trusted partners to start-ups and established companies alike. They understand company cultures, industry seasonality, and relevant market conditions. They have qualified candidates ready to interview and can deploy them on a week’s days’ notice so that their clients experience minimal delay and maximum efficiency.
Embracing temp labor can provide the agility needed to navigate economic volatility, particularly in sectors like tech that are prone to rapid changes. By leveraging temp workers, companies remain competitive, adaptable, and better positioned to handle future uncertainties
Reposted from: www.realclearmarkets.com/
Your perspective on this topic is very interesting. Thanks for the detailed explanation.