"Temp Work" - Is It A Temporary or Permanent Sign?

Many media outlets have been running stories about the rise of temp work as a good sign that the economy is recovering. Is it? Let's put this into perspective.

Temp or temporary work use to be something companies used to fill occasional administrative work or to augment staff during the busy end of the year shopping season. But over the last decade and especially over the last few years companies have moved to use temp status as a way to avoid having to provide benefits and commit to workers over the long run.

With a shortage of jobs prospects, workers have been willing to take temp work (or even contract work) knowing that it did not provide security or benefits and hoping that something permanent would come around. But the unemployment rate is over 10% and is expected to stay high for years to come (see Fed Reserve chart to the right).

The fact is that after the last business expansion cycle, roughly from 2004 to 2007, companies did not hire back many workers, choosing instead to hire overseas or temp workers. And when the recession picked up momentum, companies shed workers quickly. This had the effect of weakening the balance sheet of many American families who have burned through savings and then gone deeper into debt during the same period.

The American (or any other country's) middle-class driven economy is based on a permanent employment model. Without permanent employment the economy would look more like Mexico where workers plan their consumption from pay check to pay check.

2 of the largest industrialized countries are taking a different approach:

• In Germany the Kurzarbeit program encourages companies to reduce the amount of hours their employees work rather than laying them off (read more: Merkel Says Worst Still Ahead).
• And in Japan the government is looking at curbing the alarming shift from permanent to temporary workers (read more: Japan May Limit Hiring of Temporary Workers).

These actions are in marked contrast to the approach taken by successive U.S. administrations, Democrats or Republicans. The American approach has been to provide some modest unemployment benefits and hope the private sector will start hiring again.

But as the chart above shows, the Fed Reserve doesn't expect many jobs to return even looking out to 2012 pointing to the obvious: American companies will eventually have to hire workers or constraint their own growth but they will either be overseas or will only be temp.

What should the U.S. government do to encourage hiring of permanent workers? Make business tax credits dependent on hiring and keeping on-shore workers. The proof is in the example of several southern U.S. states that have shown tax credits are attractive to luring car mfg. such as BMW and Daimler.