Demand Volatility and the Lag between the Growth of Temporary and Permanent Employment

The growth rate of temporary help service employment is often considered to be a leading business cycle indicator because the firing and hiring of temporary help workers typically lead that of permanent workers. However, few studies in the literature focus on the mechanism that generates the lag between temporary and permanent growth. This paper investigates how firms extract signals of long-lived shocks from noisy transitory shocks and how this influences their hiring/firing decisions. Our simple model predicts that the average size of transitory demand shocks increases the lag while the average size of long-lived shocks shortens the lag. Our empirical findings based on cross-city analysis show evidence that supports the above predictions, after controlling for city size, city-specific demographic characteristics, and variables based on the industry mix in the city.