Companies Cutting Temp Workers in Warning Sign for Labor Market

Employers Are Cutting Back On Temporary Workers, Which Could Be a Sign That More Widespread Job Losses Are Coming.

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In the last five months of 2022, employers cut 110,800 temp workers, including 35,000 in December. This is the largest monthly drop since early 2021. Many economists view the temp sector as an early indicator of future labor-market shifts.

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Temporary employment typically declines before recessions and during economic slowdowns. This is because temporary workers are typically employed through staffing agencies, and are therefore easy for companies to bring on board and let go. "I see this as a real warning sign," said James Knightley, chief international economist at ING. "It looks like the jobs market may not be as strong as we thought it was, and that's a real concern."

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According to Mr. Knightley, the recent cutbacks in temporary jobs is just one more piece of evidence that companies are starting to adopt a more cost-cutting stance. He notes that corporate job-cut announcements are up significantly from a year earlier, and business executives seem to be quite somber about the overall outlook.
The labor market is strong but slowing down. In December, employers added 223,000 jobs, which is the smallest gain in two years. According to economists surveyed by The Wall Street Journal, higher interest rates are expected to cause job losses and a recession this year as the Federal Reserve’s interest-rate increases filter through the economy.

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In recent downturns, including the 2001 and 2007-09 recessions, employment in the temp sector began falling several months before employment across all sectors started to decline. For example, temp employment began to decrease in early 2007, while employment in all sectors did not start to decrease until about a year later.
Despite the recent decline in temp jobs, it's important to remember that these trends are volatile and don't necessarily indicate that a recession is imminent. For example, temp jobs fell for four months in 1995, but this was during a period of overall economic growth.

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Tom Gimbel, the CEO of LaSalle Network, a staffing firm, stated that the decreasing demand for temporary employment is focused among several large companies who are looking to reduce costs. He said that these firms are cutting back on temporary workers who were hired for specific projects, like beta testing at a tech company.
Many small businesses are still looking for temporary workers, according to Mr. Gimbel. There is still high demand for many types of temp help, including in software development, healthcare and manufacturing.

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"Small- to medium-sized companies are still hiring, because they were losing the war for talent against big companies that had an endless supply of money and budgets," he said.

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There is a broad decline in temp employment which coincides with other indications of a labor-market slowdown. This includes cooling hiring, workers taking longer to find jobs, and staying on unemployment benefits for longer periods of time. Additionally, workers' average weekly hours are back at prepandemic levels. Manufacturers' overtime hours slipped in December to the lowest level since the pandemic lockdowns and the aftermath of the 2007-09 recession.

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According to Gad Levanon, chief economist at the Burning Glass Institute, companies typically adjust their payrolls after experiencing a decline in demand.
There is weaker demand emerging in industries related to manufacturing, transportation and selling goods. However, consumer spending on services is still strong, with sectors like leisure and hospitality continuing to recover from the pandemic.

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According to Mr. Levanon, the economy is likely to see continued growth in consumer services, but a decline in other areas. He expects the economy as a whole to contract by the middle of this year.

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Some of the recent declines in temporary employment may simply reflect a return to normalcy after an aggressive hiring spree that took place throughout much of 2021 and into early 2022. Many businesses, such as supermarkets and food processors, hired short-term staff to help meet surging demand during that time.
Some staffing industry experts believe that the decline in temp workers is due to an increase in permanent hiring. With unemployment reaching a 50-year low in December of 3.5%, the labor market is very tight.

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Traci Fiatte, chief executive of staffing firm Randstad North America, said that attrition and turnover rates remain high, as job seekers are confident in their employment opportunities. As a result, companies are trying to hold onto their workers.

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"If they find a good temporary employee, they will take them on as a permanent employee," Ms. Fiatte said.