In a recent article, we examined the surprising weakness in recent temp staffing demand despite apparently ideal macroeconomic conditions, identifying the likely driver as heightened near-term perceptions of risk. But there’s another, equally perplexing mystery: If companies have shifted their preference away from temps but continue to hire for permanent roles, why have they also massively reduced their use of staffing firms to help with all this hiring?

SIA has published annual estimates of the US staffing industry’s revenue from direct hire recruitment since 1996. In every year through 2022, the direction of the industry’s revenue growth matched the direction of employment growth published by the US Bureau of Labor Statistics.  But then, in 2023, the trend shifted: The number of jobs grew, but direct hire revenue fell by 16.7%. And this divergence seems to be continuing — while obviously full-year data isn’t yet available for 2024, SIA forecasts overall revenue declines of 10% despite year-on-year job growth of over 2.4 million through September.

Conventional wisdom would tell us that this simply cannot happen, but the fact it has suggests that the relationship between labor demand and direct hire recruitment demand is more complex than previously understood.  Upon closer examination, we found that annual changes in direct hire revenue have an extremely strong inverse relationship with shifts in the ratio of job seekers to available openings (S/O ratio):

This makes intuitive sense: more job seekers per opening means hiring managers can more easily find suitable candidates, reducing their need for staffing services.  Yet the question remains why the S/O ratio shot up in 2023 and remained elevated in 2024.

Job seekers take two forms: the unemployed and those employed and looking for a new job (job switchers).  Using the “quits” level as a proxy for job switching, we built a model comparing year-on-year changes in the S/O ratio to direct hire revenue and found that the 2023 decline was significantly larger than we’d expect from the historical correlation.  Some of that is attributable to the increased rate of job switching seen since the pandemic, as the rise of remote work and changes in norms and laws around pay transparency and noncompete rules make it easier for employed workers to apply for a larger set of open jobs than in the past.  While quits have slowed from their Great Resignation heights, they remain historically elevated, and as job openings slowed faster, they helped push up the S/O ratio.  But even considering this factor, calculating the S/O ratio from official figures only accounts for about 35% of the observed decline in DH revenues.

The rest of the story appears to come from excess immigration.  According to recent analyses by the Brookings Institution, the US Congressional Budget Office, and Goldman Sachs, the official figures for job seekers fail to account for the recent immigration surge, which has resulted in somewhere between one and two million extra job seekers from new arrivals receiving legal work authorization.  Given the size of the US labor force, these additions have had a minimal impact on unemployment rates — Goldman Sachs puts it at around 10 basis points — but a massive effect on the S/O ratio.

When we increase the number of job seekers in our model for 2023 and 2024 to account for this excess immigration impact, the S/O ratio jumps by over 17% and its estimate for 2023 direct hire revenue perfectly matches SIA’s numbers. It also predicts a further decline of 5 to 10% in 2024, aligning with SIA’s most recent forecast from September.

Looking ahead, we expect this trend to persist in 2025: Even without this theorized excess immigration, the S/O ratio has continued to increase through 2024 with little sign of an impending reversal, suggesting that it’s likely to remain elevated for some time, continuing to pose a challenge for permanent placement growth in the staffing industry.

The staffing industry is navigating uncharted waters. Understanding the forces driving these trends will be crucial for staffing leaders as they seek to adapt during this unprecedented period and emerge stronger.