Temp employment is the core of the staffing industry, and it’s long played a crucial role in the US economy. For employers, temp labor provides the ability to scale workforces up and down rapidly in response to changing market conditions, enabling them to support immediate needs without increasing fixed payroll and benefits costs or incurring the greater long-term expenses associated with hiring, onboarding, training, managing and replacing permanent employees. This critical aspect of low-cost flexibility has cemented temps as a small but significant portion of the American labor force, ranging from about 1.5% to just over 2% of nonfarm employment since the mid-1990s.

This ratio of temps as a percent of total employment, called the temp penetration rate, typically rises during periods of strong GDP growth and low unemployment as employers use more temps to scale their workforces rapidly in a tight labor market, then falls during economic slowdowns as companies protect their investment in full-time employees — and staffing sales growth closely follows changes in the penetration rate. But for the past two years, this pattern has been flipped on its head. Temp penetration peaked at just over 2% in March 2022 but then declined steadily to 1.7% by May 2024, despite the economy growing by over 2.5% annually and official unemployment remaining below 4%. In the 34 years of reliable data, there has never been a sustained drop in the temp penetration rate this long or this fast without the economy tipping into recession. But many experts now think that the US economy may achieve a “soft landing,” successfully taming inflation without a decline in GDP or high unemployment.

In order to make sense of this confusing recent pattern, it’s essential to understand why companies have shifted their preferences away from temps, steadily employing fewer of them despite the private sector as a whole adding millions of jobs. It can’t just be a natural demand correction after the post-pandemic hiring frenzy, and it can’t just be an effect of increasing labor productivity, as both of these should also have put pressure on full-time hiring. So why are companies moving away from temps?

The strongest candidate seems to be elevated anxiety. Between high inflation, various geopolitical conflicts, a wave of layoffs in the tech sector, a narrowly-averted banking crisis and other sources of volatility, corporate decision-makers have struggled with prolonged anxiety about the near future. But the medium- and long-term picture remains relatively stable, with inherent uncertainty but no specific anxiety, which seems to have led to a situation akin to an inverted yield curve in bond markets. 

The Federal Reserve began raising interest rates in April 2022 to control high inflation, sparking fears of a recession. It is no coincidence that the shift away from temps began around the same time. Data shows that temp penetration rates are much more closely (inversely) correlated with the Anxious Index — a measure of perceived recession risk — than with actual GDP growth. When companies fear an impending downturn, they stop hiring temps, even if long-term prospects remain strong and they continue expanding their permanent workforces in anticipation of future growth.

That means the shift away from temps seems to be more a product of the so-called “vibecession,” the sense of impending doom even in the face of stubbornly positive economic numbers, than a reflection of macroeconomic reality.

The good news for the staffing industry is that the Anxious Index seems to be falling back to more “normal” levels in recent quarters, suggesting that temp demand should soon stabilize relative to broader job growth. But it remains to be seen whether and when the penetration rate will begin growing again, and whether corporate executives end up regretting their anxiety-driven shift away from temps in the first place as they’re left dealing with high fixed labor costs and low workforce flexibility.