Temporary Agency Work and Labor Misallocation

Raquel Carrasco (), Ismael Gálvez Iniesta and Belén Jerez

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: The triangular dynamic relationship between outsourced workers, intermediary employers, and user firms has received limited theoretical attention. This paper seeks to address this gap by focusing on temporary agency work. We develop a two-period search model in which firms can hire workers directly or through a temporary work agency (TWA). The agency acts as a matchmaker, providing flexibility by spreading termination risks across firms and certifying assignment quality through worker screening. However, it faces a trade-off between creating productive matches and retaining control over workers for future placements. In equilibrium, this results in inefficient assignments, prolonged TWA employment spells, and lower transition rates to stable jobs, ultimately reducing overall productivity. Distortions are amplified when wages in direct-hire jobs are set through Nash bargaining rather than directed search. Although transfer payments from firms poaching TWA workers could, in principle, mitigate these distortions, such transfers are often restricted by labor regulations. The model predicts that TWA employment is particularly relevant for low-skilled workers, a finding supported by empirical evidence from countries like Spain. Furthermore, it predicts that these low-skilled workers are more likely to become trapped in inefficient job assignments. Drawing on Spanish administrative data, we document both poaching and misallocation among workers employed through TWAs. Building on these findings, we simulate a calibrated model that replicates key features of the data

Keywords: Temporary; Agency; Work; Intermediation; Search; and; matching; Screening; Efficiency (search for similar items in EconPapers)
JEL-codes: D58 D61 J20 J42 (search for similar items in EconPapers)
Date: 2025-06-25
New Economics Papers: this item is included in nep-eur and nep-lma
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Related works:
Working Paper: Temporary agency work and labor misallocation (2024)
Working Paper: Temporary Agency Work and Labor Misallocation (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:47470

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