Optimal Staffing Strategies : Use of Temporary Workers, Contract Workers and Internal Pools of Contingent Labor

Temporary help agencies are among the largest employers of American workers today. Depending upon the interpretation, the Bureau of Labor Statistics counts between 3 and 30 million Americans in contingent and part-time work arrangements. We model firms' use of contingent labor in maximizing profits when facing both uncertain labor demand and supply. We show that firms should rely on both full-time and contingent labor and that such contingent labor may be provided by internal pools of flexible workers or by external labor supply agencies. In particular, we consider contracts which firms establish with labor supply agencies to provide contingent labor as well as the process such agencies follow when supplying labor. We show that such contracts can be beneficial to both firms and agencies. Numerical experiments demonstrate that firms should increasingly rely on external labor sources as labor availability increases and that they should increasingly rely on formal contracts for contingent labor as the added value of labor increases. We validate our results with evidence of the actual behavior of firms across a wide range of industries