Andrea Atencio-De-Leon (University of Illinois)

Title: Contracting out Labor Market Dynamism

Abstract: This paper investigates 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.

You can find the paper here.