Monday, May 13, 2013

Employment services and misclassification

Lately there has been some talk about temporary help services (see here and here). This industry, and the industry of employment services more generally, is interesting not only for its potential business cycle implications but also for its economic measurement implications.

In Census and BLS data, "employment services" is an industry category (4-digit NAICS 5613) that includes job placement services, temp agencies, and other services that allow businesses to outsource HR and other tasks. We have seen some interesting activity in employment services during the last 20 years (click for larger image):


Here I've plotted "employment services" employment as a share of "professional and business services" employment (red line). Observe that this ratio has risen by almost 5 percentage points since 1990. Since readers may know that services generally have made huge gains in employment during this time, I also provide "employment services" employment as a share of total private nonfarm employment (blue line).

What interests me is the fact that a lot of employees in this industry are misclassified by industry codes. People on the payrolls of temp agencies could actually be working in any industry. This may become a measurement problem if employment services resume their gains of recent decades; to the extent that these workers are misclassified, US data overstate the number of workers in these narrow services industries and understate the number of workers for the industries in which temporary employees are working.

Consider an example. If I have a manufacturing plant with a big HR department, but I decide to close the HR shop and pay an HR services firm to do that work, very little has actually changed in the industry composition of the US economy--but the data will record that the manufacturing sector shrank and the services sector grew.

Consider another example. Suppose a change occurs among retailers that makes them want to fill existing jobs with temporary, rather than permanent, workers, and they do this by contracting with temp agencies. Again, the actual industry composition of employment hasn't changed, but the data will indicate a smaller retail sector and a larger services sector.

Something to keep in mind for those watching the evolution of the US industry composition.

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