The Attractiveness of Temporary Employment to Reduce Adjustment Costs

In this paper I determine the importance of adjustment costs in employers hiring decisions. Temporary work arrangements offer potential ways to avoid adjustment costs. I estimate employers willingness to pay for the characteristics of these work arrangements. I distinguish regular contracts, direct hire temporaries, temporary agency contracts, freelance workers and contract workers, which all have their specific effect on hiring and firing costs. Conjoint analysis on a sample of 1000 Dutch employers is used to determine the relative preference for the constituent characteristics of these employment arrangements. My results indicate that strategies that reduce turnover are more important than strategies to reduce adjustment costs per worker. On average regular contracts are most attractive for employers, because they allow for investment in (firm specific) human capital. Non-standard work arrangements are valued in some situations, e.g. in highly volatil! e environments. This suggests that temporary contracts are used not only for screening purposes, but also to adjust the workforce to fluctuations on the product market.