Contingent Labor Contracting Under Demand and Supply Uncertainty

Abstract:     
Firms are increasingly using contingent labor to flexibly respond to demand in a wide array of environments and labor supply agencies are growing to fill this need. As a result, firms and agencies are engaging in long term contracts for labor supply. We develop mathematical models of the interaction between firms and labor supply agencies when demand and supply are uncertain. We consider two models of labor supply uncertainty, termed productivity and availability uncertainty, and study how each affects the nature of the contracts formed. In the case of productivity uncertainty we find that it is possible to construct a contract that coordinates the firm and agency hiring in an optimal way. The result depends upon the firm's ability to monitor the quality of the contract workers. In contrast, we show that in environments characterized by availability uncertainty, optimal contracts are not possible. In such environments, while contracts can provide benefits over traditional use of temporary labor, only by emphasizing short term relationships can contracts be fully elective.

Number of Pages in PDF File: 35

JEL Classification: J22, M12

working papers series