Low-Income and Low-Skilled Workers Involvement in Nonstandard Employment. Why do firms use alternative work arrangements?

10/01/2001

The reasons for firms to use alternative work arrangements are almost as varied as the different types of these arrangements. Firms elect to use workers in alternative work arrangements for a variety of reasons. Cost effectiveness is one: contingent employment and alternative work arrangements enable employers to lower wages and benefit costs. Another is the flexibility provided by contingent workers that allows employers to expand and contract their workforce with the economy. Researchers have also suggested that employers use temporary help agencies to screen workers for permanent positions, thereby reducing turnover costs and training costs.(24)

Several surveys of employers have been conducted in recent years to better understand employer use of alternative work arrangements--the most recent is a nationally representative survey of employers conducted by the Upjohn Institute for Employment Research.(25) This survey of 550 private sector employers with five or more employees asked firms questions about their use of the following alternative work arrangements: agency temporaries, on-call workers, independent contractors, short-term hires,(26) and regular part-time workers. We will limit our discussion to those work arrangements previously defined as alternative: agency temporaries, on-call workers, and independent contractors. Upjohn gathered information on (1) which employers use flexible staffing arrangements; (2) how much these employers use them; (3) why they use them; (4) how the wages and benefits of flexible workers compare to traditional workers; and (5) whether employers have increased or decreased their relative use of these arrangements since 1990, and if so, why.(27)

The first finding is that the use of alternative workers is pervasive, but varies by firm size and industry. As shown in Table 2.2, Houseman (1997) reports that the Upjohn Survey found that 27 percent of surveyed firms used on-call workers, 46 percent used agency temporaries, and 44 percent used contract workers in 1995. Between 1990 and 1995, the overall percentage of firms using on-call workers and agency temporaries stayed about the same, with equal shares of firms increasing and decreasing their use of such arrangements. Houseman also reports that the incidence of alternative work arrangements increases with firm size. However, even among small firms (with five to nine employees), use of such arrangements is non-negligible. Approximately one-sixth of small firms used agency temporaries and on-call workers, while one-third used contract workers. The industry variation is substantial: 72 percent of manufacturing firms used agency temporaries, while the use of on-call workers was highest in the services industry (44 percent), and the incidence of contract workers was highest in the mining and construction industries (see Table 2.2) (Houseman, 1997).

Table 2.2
Percentage of Firms Using Workers in Alternative Arrangements
by Selected Firm Characteristics, as of July and August 1996
  On-call Workers Temporary Help Agency Workers Contract Workers
Firms using alternative workers
Use 27.3% 46.0% 43.5%
Dont use 72.4% 53.5% 54.7%
Dont know 0.4% 0.5% 1.8%
Firms reported change in use of alternative workers since 1990
Increased 17.3% 24.3% NA
Decreased 15.3% 23.9% NA
Remained about the same 64.7% 47.8% NA
Dont know 2.7% 4.0% NA
Industries using alternative workers
Agriculture 13.0% 50.0% 25.0%
Mining/Construction 11.0% 56.0% 61.0%
Manufacturing 13.0% 72.0% 54.0%
Transportation, Public Utilities, and Communications 21.0% 50.0% 54.0%
Trade 16.0% 37.0% 34.0%
Services 44.0% 44.0% 47.0%
Source: Houseman 1997.

Houseman (1997) provides empirical evidence as to why firms use alternative work arrangements. The Upjohn Institute survey(28) showed that the reasons vary by work arrangement, but staffing reasons are more frequently cited than others (see Table 2.3). Firms most often use on-call workers and agency temporaries to fill in for an absent employee who is sick, on vacation, or on family medical leave or to provide needed assistance at times of unexpected increases in business. Firms also report frequently using agency temporaries to fill a vacancy until a regular employee is hired, while a smaller percentage of firms hire temporary or on-call workers to meet seasonal fluctuations in their workload.

Table 2.3
Reasons for Firms Using Workers in Alternative Arrangements, as of July and August 1996
  On-call Workers Temporary Help Agency Workers
Staffing reasons for using alternative workers
Fill vacancy until regular employee is hired 26.0% 46.6%
Fill in for absent regular employee who is sick, on vacation, or on family medical leave 69.3% 47.0%
Seasonal needs 29.3% 28.1%
Provide needed assistance during peak-time hours of the day or week 37.3% 14.2%
Provide needed assistance at times of unexpected increases in business 50.7% 52.2%
Special projects 26.0% 36.0%
Other reasons for using alternative workers
Screen job candidates for regular jobs 8.0% 21.3%
Save on wage and/or benefit costs 6.0% 11.5%
Provide needed assistance during company restructuring or merger 6.0% 7.5%
Fill positions with temporary agency workers for more than one year NA 5.1%
Save on training costs NA 5.1%
Special expertise possessed by this type of worker 16.0% 10.3%
Source:  Houseman 1997.

The screening hypothesis is not borne out by the empirical evidence--firms are less likely to cite non-staffing reasons for hiring on-call workers and agency temporaries. Only one in five firms hires agency temporaries to screen them for regular jobs, and only 8 percent of firms hire on-call workers to screen them for permanent positions. On-call workers were used by about 16 percent of firms for their special expertise, while agency temporaries were used by about 10 percent of firms for their expertise.

Although saving on wage and/or benefit costs has often been cited as an important reason for the use of workers in alternative work arrangements, the evidence in Table 2.3 does not support this. In fact, as Table 2.4 shows, most firms report that hourly pay costs are about the same for on-call workers as regular workers in similar positions while hourly pay costs are actually higher for agency temporaries for the majority of firms. The story changes somewhat when benefit costs are added to the hourly pay costs. Nearly three-quarters of firms say their costs for on-call workers are lower than benefit and wage costs for regular workers in a similar position. On the other hand, firms report that their costs for agency temporaries are about the same or lower than benefit and wage costs for regular workers in similar positions. However, firms may still be saving money overall since the flexibility of alternative work arrangements allows them to hire workers for short-term needs.

Table 2.4
Percentage of Establishments Responding that the Relative Hourly Pay Costor Hourly Pay Plus Benefits Cost of Alternative Workers is Generally Higher, Relatively Higher, or About the Same as the Hourly Pay Cost or Hourly Pay Plus Benefits Cost of Regular Employees in Similar Positionsby Type of Alternative Arrangement, as of July and August 1996
  On-call Workers Temporary Help Agency Workers
Firms hourly pay cost for alternative workers(a)
Higher than regular workers 16.7% 62.1%
Lower than regular workers 18.7% 13.4%
About the same as regular workers 61.3% 21.7%
Don't know 3.3% 2.8%

Firms hourly pay plus benefit cost for alternative workers(b)

Higher than regular workers 5.3% 19.4%
Lower than regular workers 72.7% 38.3%
About the same as regular workers 19.3% 38.3%
Don't know 2.7% 4.0%
Source:  Houseman 1997.
a.  For temporary help agency workers, the comparison was between the hourly billed rate for temporary help agency workers and the hourly pay cost of regular employees in comparable positions.
b.  For temporary help agency workers, the comparison was between the hourly billed rate for temporary help agency workers and the hourly pay plus benefit cost of regular employees in comparable positions.

In sum, the empirical evidence suggests that while there are many reasons for firms to use alternative work arrangements, firms' staffing needs--primarily short term--are the main source of demand for on-call workers and agency temporaries. Firms do not often use alternative work arrangements to screen employees for full-time, permanent positions--although some firms do use these workers for their special expertise in a particular area. And, only five percent of companies report hiring agency temporaries to save on training costs. The cost savings in terms of wages and benefits are also not a major element in firms' decisions, as shown by the small percentages of firms that cite such savings as a reason for hiring temporaries or on-call workers.