Contracting out labor market dynamism: domestic outsourcing, firms’ recruiting behavior, and development

Atencio De Leon, Andrea Carolina

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https://hdl.handle.net/2142/120320 Copy

Description

Title

Contracting out labor market dynamism: domestic outsourcing, firms’ recruiting behavior, and development

Author(s)

Atencio De Leon, Andrea Carolina

Issue Date

2023-04-26

Director of Research (if dissertation) or Advisor (if thesis)

Macaluso, Claudia

Doctoral Committee Chair(s)

Forsythe, Eliza C

Committee Member(s)

• Bernhardt, Mark D
• Parente, Stephen L
• Garin, Andrew L

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Outsourcing
• domestic outsourcing
• labor market dynamism
• job reallocations
• worker reallocations
• temporary help workers
• responsiveness

Abstract

This dissertation shows that domestic outsourcing challenges our understanding of labor market dynamism and firms' recruiting behavior ---its measurement, definition, and dynamics. The first two chapters define and quantify the role of domestic outsourcing on the decline in labor market dynamism the U.S. has experienced since at least the 1990s. They tackle this issue from the worker and business perspectives, quantifying to what extent the increase in domestic outsourcing accounts for the decline in both worker and job reallocations. My results suggest that at least part of the decline reflects a transformation of the labor market towards the use of intermediaries in the matching process rather than a decline in underlying dynamism. Through the third chapter, this dissertation also provides new evidence on the matching process in a developing economy's labor market and its differences from that of a developed economy. This evidence informs frictional labor market models and reconciles higher turnover rates with lower productivity: two defining characteristics of labor markets in developing economies. The first chapter connects the increasing use of domestic outsourcing with the decline in labor market dynamism, defining the \textit{omitted reallocation} problem and showing that it is pervasive across labor market fluidity indicators. The empirical analysis focuses on aggregate worker reallocations, quantifying the magnitude of the omitted reallocations problem on this labor market fluidity indicator. Domestic outsourcing happens when firms contract with other firms or individuals in the U.S. to provide goods and services previously performed in-house. On the other hand, outsourced employees are workers whose employer of record (the staffing agency) is not the firm where they perform their job tasks (the client). While remaining on their staffing agency's payroll, outsourced employees reallocate across client firms. In fact, they do so at a higher pace than payroll employees, but their reallocations are omitted in the datasets used to measure labor fluidity. Therefore, the measured pace of reallocation is underestimated. To quantify this channel, I provide a decomposition of the worker reallocation rate that illustrates a relationship between the decline in reallocations and an increase in outsourced employees' job tenure. I successfully test this implication in microdata from the Job Tenure Supplement of the Current Population Survey. I find that between 1996 and 2018, outsourced employees average tenure increased by 18 months, while the average tenure of payroll employees increased by less than 8 months. The tenure estimates translate into an increasing proportion of omitted reallocations between 1994 and 2018, accounting for over one-fifth of the observed decline in the worker reallocation rate. The second chapter assesses how domestic outsourcing affects plant-level labor responses to revenue productivity shocks and biases the measurement of aggregate job reallocations. I develop a methodology to transform reported expenses on temporary and leased workers into plant-level outsourced employment using comprehensive administrative data on the U.S. manufacturing sector. I show that plant-level outsourced employment is twice as responsive as payroll employment to revenue productivity growth deviations and adjusts more quickly. The evidence indicates that domestic outsourcing is an important margin of adjustment that plants use to modify their workforce while they learn about the permanency of the shock. These micro implications have significant macroeconomic measurement consequences. I show that the measured pace at which jobs reallocate across workplaces is underestimated. On average, every year, we omit the equivalent to 15\% of payroll reallocations. The extent of mismeasurement varies with the business cycle, falling in downturns and increasing in upturns. My findings suggest that the increasing use of labor market intermediaries accounts for a substantial portion of the measured decline in labor market dynamism and further reflects structural adjustments in the choice set of firms when facing shocks. In the third chapter, together with Munseob Lee and Claudia Macaluso, we investigate how workers and jobs match in the context of a developing economy's labor market and what differences arise with respect to a developed one. To that end, we design a survey of employers' recruiting behavior and implement it in Peru and the Southeastern U.S. We provide three novel facts: (1) Vacancy duration is substantially shorter in Peru than in the U.S. (2) There is little difference in how employers recruit candidates for their open jobs. Referrals from employees or family recommendations, together with job posting, are the most popular methods in both countries. (3) In Peru, over-qualification is common in filled jobs. Furthermore, on average, jobs in Peru tend to be less specialized than similar ones in the U.S. To show this, we provide the first data on detailed occupational skill usage across occupations in a developing economy and find that, with respect to the same U.S. occupational title, Peruvian jobs display higher dispersion in the importance of a variety of skill dimensions. These facts inform models of frictional labor markets and shed light on the contribution of such frictions to stunted firm growth and productivity deficits in developing economies.

Graduation Semester

2023-05

Type of Resource

Thesis

Copyright and License Information

Copyright 2023 Andrea Atencio De Leon

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