What Does Temp Hiring Say about the Drop In Unemployment?

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Job seekers fill out applications (Mike Segar/REUTERS)

Being a temp is never easy. December was no different.

Friday’s job report left many economy watchers scratching their heads. The report showed a much bigger drop in the unemployment rate than was expected in December. The number dropped to 9.4%, from 9.8% the month before. That was the biggest drop in the unemployment rate since the beginning of the recession. Great news, right? Maybe not. Overall, the economy added just 103,000 jobs in the last month of the year. That was better than 39,000 added in November, but it was less than the 160,000 jobs that many predicted would be added in December. And much less than you would expect at this point in a recovery. Back in July of 1983, when the unemployment rate posted its first major dip of that recession, down to 9.4% from 10.1%, the economy added 400,000 jobs. Two months later it added over a million.

So was the jobs report great news, or just another sign that the economy in 2011 will remain weak? The real answer may be in temp jobs. And over the next six months that may be the statistic to watch. Here’s why:

The problem is the unemployment rate, despite its popularity, is a highly flawed measure of the job market. In bad economic times, like now, when job seekers are likely to get frustrated, the unemployment rate can be more unreliable than even usual. That’s because it tracks not just people who are out of work, but changes in the number of people who are actually looking for work. So if fewer people are looking for work, then the unemployment rate will drop–having nothing to do with whether those people who used to be looking for work actually found jobs or not. And that is in part what happened in December, as you might expect around the holiday times. About 250,000 people stopped looking for work in the last month of the year. So the measure rate of unemployment dropped more than if we had just tracked the number of people who were added to job rolls.

That’s why some economists at the beginning of recoveries look closely at another measure of job market strength: Temporary hiring. Temporary hiring is usually considered one of the best leading indicators of job growth. At the early stages of a recovery companies are reluctant to hire full-time employees. But as economic activity increases, companies need more workers. So they hire temps. And that’s what has been happening recently. Temporary hiring has been one of the few bright spots in the economy recently. In November, companies added just over 30,000 temp positions, nearly as much as the overall job gain. So that has been a sign that the job market is improving.

That changed in December. Companies added just 16,000 temp positions in the last month of the year. How bad a sign is that? That depends on where you think we are in the economic recovery. Full-time jobs are better for the economy than temp hires. It shows more confidence that companies believe an increase in business will continue. Also if someone has a regular pay check, they are more likely to spend more freely than if all they have is a temp job. And more spending is something we need right now. So you could argue that the fact that temp jobs made up a smaller portion of the overall jump in jobs in December is a good thing.

The question is whether this happening too early. Heidi Shierholz of the liberal leaning Economic Policy Institute says she thinks it is. She says that the large portion of job growth coming from temp jobs was a problem, especially if it continued. But with 14.5 million people still out of work, any job is a bonus for the economy. And we are a long way from where temp hiring was when the economy was strong in early 2008. What’s more, temp jobs can often lead to permanent jobs. So fewer temp jobs could mean fewer permanent jobs next month. Shierholz says in a sustained job recovery, temp jobs will continue to grow, but permanent jobs will grow faster. We had that later and not the former. And that could be the most important sign that today’s large drop in the unemployment rate is nothing to cheer about.

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