Employment services industry: a harbinger of the economy
By Jungmin Charles Joo, Associate Research Analyst, DOL

Ten years ago, personnel supply industry employment was analyzed (first issue of the Digest, July 1996) as a leading indicator of Connecticut's total nonfarm employment growth. As this article will show, this still holds true when using the broader NAICS-based industry called employment services, which includes both temporary help services (equivalent to the former personnel supply industry) and employment placement agencies. A majority of employment services employment is in businesses that provide temporary help services. The NAICS-based employment data go back to 1990. Current data appears monthly in the Digest, on page 12, under "nonfarm employment estimates."

National temporary help services trends

Nationally, after the 2001 recession, employment growth in the temporary help services industry began a generally upward trend and, more recently, added 151,700 jobs in 2005. In this latest phase of the business cycle, this industry was the major contributor to total nonfarm employment growth. Since hitting an employment low in April 2003 (following a peak in April 2000), the temporary help services industry recovered nearly all (91 percent) of the lost jobs by December 2005.

The temporary help services industry supplies labor to all types of businesses, including manufacturing, freight transportation, information technology, and healthcare. Companies may bring in temporary workers to keep pace with increased demand before hiring permanent workers. This practice ensures that increased demand is long lasting before permanent hires are made.

Trends in Connecticut's employment services industry

As in the nation overall, service providing industries continue to be the fastest growing sectors in the State. Over the 16-year period (1990-2005), goods producing industry employment, led by job losses in manufacturing, faced an annual average decline of 2.1 percent, while the service providing sector experienced a 0.7 percent average increase annually. The growth in the employment services industry was due mostly to shifts in employer leasing contracts for business services such as accounting, payroll, and building maintenance. During the same period, Connecticut's overall average employment grew by only 0.2 percent. Within the service providing industries, the professional and business services sector employment has grown by an annual average of 1.1 percent. Employment services, a part of professional and business services, experienced an even greater growth of 3.3 percent, even though it currently makes up less than two percent of total employment in Connecticut (see table below).

What is the employment services industry?

The employment services industry (NAICS 5613) consists of employment placement agencies (NAICS 561310) and temporary help services (NAICS 561320). Employment placement agencies are establishments primarily engaged in listing employment vacancies and in referring or placing applicants for employment. The individuals referred or placed are not employees of the employment agencies. Examples include: babysitting bureaus (i.e., registries); casting agencies or bureaus (i.e., motion picture, theatrical, video); employment agencies; employment registries; and model registries.

Temporary help services are comprised of establishments primarily engaged in supplying workers to clients' businesses for limited periods of time to supplement the working force of the client. The individuals provided are employees of the temporary help service establishment. However, these establishments do not provide direct supervision of their employees at the clients' work sites. Examples include: help supply services; labor (except farm) contractors (i.e., personnel suppliers); manpower pools; model supply services; and temporary employment or temporary staffing services.

Employment services trends lead overall employment

The seasonally adjusted NAICS-based data, indeed, shows that this industry's employment trend continued to lead the aggregate nonfarm employment trend. As the Chart 1 above shows, peaks and troughs in the employment cycle of the employment services industry have led those in the total employment cycle during the latest recession and recovery.

A closer look at the data reveals that the employment services industry's changes preceded changes in total State employment by 3 to 18 months. This supports the notion that, during a recovery, businesses sometimes utilize temporary workers until they are convinced that they can maintain additional workers on a permanent basis. During the February 1989-December 1992 recession, employment services employment reached its trough in June 1991, thus signaling a total employment recovery 18 months ahead.

On the other hand, when firms start to cut back on the use of temporary workers, this is an early indicator that a recession will soon follow. Before the Connecticut economy entered the last recession in July 2000, as measured by total nonfarm employment, the temporary help services industry peaked eight months earlier in November 1999. This industry bottomed out in June 2003, three months prior to the trough in total employment in September 2003, signaling the end of the recession.

The intensity of the employment cycle

The over-the-year growth rate in employment in the employment services industry has been much higher than that of total employment, averaging 6.9 percent, compared with 0.6 percent in the aggregate State employment over the last two years. Also evident, employment services industry job growth is much more volatile, falling more during economic contractions and rising more during expansions. However, the employment services industry's magnitude of change appears to correspond proportionately with total employment aggregate changes. In other words, the greater the decline in the employment services industry, the greater the decline in total employment which soon follows.

A harbinger of the economy

The recent trend in the employment services industry suggests that we are in a flat economy, with no clear indication of another downturn anytime soon. However, its weak job growth could also foretell continued slow job growth overall in the State. Employment services industry employment trends could continue to serve as a reliable leading economic indicator. By continuing to track the movements of the employment services industry, we may be able to get early notice of the next turn in Connecticut's employment.

Sources:

"Personnel supply industry: leading growth indicator," The Connecticut Economic Digest, July 1996, Office of Research, Connecticut Department of Labor.

"Payroll employment grows in 2004," Monthly Labor Review, March 2005, the Bureau of Labor Statistics.

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