CWS 3.0: September 28, 2011 - Vol. 3.26


Global: Comparing U.S. and European Temp Penetration Rates

With annual revenue of $103 billion in 2010, the U.S. is the largest staffing market in the world. However, given the size of its working population, the maturity of the staffing market and a liberal regulatory environment, it may seem surprising that it is not actually bigger than it is.

Many would acknowledge that, compared with the rest of the world, the U.S. staffing market is more innovative and sophisticated — certainly in terms of procurement programs available. Yet, in 2009 the U.S. penetration rate (number of temporary agency workers as a percentage of all workers) was only 1.3 percent, lower than all the major continental European staffing markets, including Germany’s, which is barely more than a decade old. Penetration rates in 2009 (the last year for which global comparisons were published) were also significantly higher in Japan (1.7 percent) the U.K. (3.6 percent) and South Africa (6.5 percent). Consider this: The U.K. staffing market is one third the size of the U.S. market in terms of revenue, while its overall population is only a fifth.

The more surprising comparison, however, is with countries like France and Belgium, where quite restrictive legislation makes hiring temporary agency workers a relatively complex, bureaucratic process. Nevertheless, penetration rates in these markets, 1.7 percent each, still exceeds that of the U.S.

The reason for the differences lies in the degree of restrictive legislation relating to the dismissal of permanent workers. Simply put, demand for temporary staffing is higher in more regulated European temporary staffing markets because employers are even more wary of the potential obligations they take on from hiring permanent workers.

Indicators of Employment Protection
Since 1985, the Organisation for Economic Co-operation and Development (OECD) has maintained an index called the Indicators of Employment Protection. It is a sophisticated analysis that takes the following factors into account:

  • Individual dismissal of workers with regular contracts: incorporates three aspects of dismissal protection: (i) procedural inconveniences that employers face when starting the dismissal process, such as notification and consultation requirements; (ii) notice periods and severance pay, which typically vary by tenure of the employee; and (iii) difficulty of dismissal, as determined by the circumstances in which it is possible to dismiss workers, as well as the repercussions for the employer if a dismissal is found to be unfair (such as compensation and reinstatement).
  • Additional costs for collective dismissals: most countries impose additional delays, costs or notification procedures when an employer dismisses a large number of workers at one time. This measure includes only additional costs that go beyond those applicable for individual dismissal. It does not reflect the overall strictness of regulation of collective dismissals, which is the sum of costs for individual dismissals and any additional cost of collective dismissals.

According to the latest OECD analysis (based on 2008 market data), Germany and Italy have the most stringent protections in place for permanent workers, followed by Luxembourg and Sweden. Interestingly, Sweden, Germany and Italy are also among the fastest growing staffing markets in Europe in 2011, according to Staffing Industry Analysts’ estimates.

While the U.S. doesn’t have the lowest levels of protection against dismissal among the markets monitored by the OECD, it does land toward the top of the list. The top honor goes to Brazil, followed by New Zealand and Chile — all southern hemisphere economies.

Most-Protected Employment Markets Least-Protected Employment Markets
1. Germany
2. Italy
3. Luxembourg
4. Sweden
5. China
6. Slovak Republic
7. Belgium
8. Mexico
9. Slovenia
10. Netherlands 
1. Brazil
2. New Zealand
3. Chile
4. United States
5. Japan
6. India
7. South Africa
8. Canada
9. Ireland
10. United Kingdom 

Economic Effects
It is debatable whether it is economically or socially beneficial for countries to have protections in place for workers. Economists don’t even agree as to whether employment protections are good, bad or indifferent. Some believe they directly impact unemployment levels, wages, efficiency and profit — even productivity. While intuitively, most would assume that high levels of employment protection would lead to high levels of unemployment, the evidence is not so straightforward. For instance, historic levels of unemployment in the U.S. and Portugal have been quite similar despite the fact that the former has relatively low levels of protection while the latter has high levels of protection. The reason proposed by some economists is while employment protections are a disincentive to job creation, they act as a disincentive to job destruction as well. The net effect is less volatile fluctuations in labor demand over the business cycle, leading to smoother employment/unemployment patterns. For an academic perspective, see Unemployment and Labor Market Rigidities: Europe versus North Americaby Stephen Nickell.

High demand for temporary staffing goes hand in hand with highly protected labor markets. Of course, it is rather ironic that protections that are alleged to make labor markets less flexible have the inevitable result of driving up demand for contingent labor and thereby increasing flexibility. Unfortunately, this also creates a rather negative perception toward temporary agency staffing in many parts of Europe as it is perceived as a way for employers to circumvent their ‘proper’ employment obligations.

As staffing markets recovered in 2010, the U.S. penetration rate improved to 1.7 percent and, in 2011, the rate is likely a little higher still. However, the pace of growth in Europe since 2009 has been just as strong as the U.S., if not stronger. While it maintains a liberal market economy, it seems unlikely that the U.S. staffing market will ever match the same levels of penetration seen in Europe.


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