Permanent or Temporary: Determining Plausible Hiring Practices

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Abstract

This paper examines the application of various factors and costs along with the demand curve in determining plausible hiring practices when it comes to hiring either permanent or temporary workers.

What was presented was various data sets involving Temporary demand, Seasonal demand or Popularity demand, the Debt Crisis in Europe, Outsourcing, the Theory of Consumer Behavior and Market Saturation as well as other constraining factors which could possibly influence the decisions influencing a company’s hiring practices.

It was shown that given specific percentile increases or decreases involving the demand curve a company can thus accurately determine when it would be necessary to hire a specific type of worker for a particular period of time.

Executive Summary

Increased levels of demand do not necessitate the need to hire permanent workers for a company since it is uncertain whether demand levels will continue to remain at elevated levels.

Introduction

The recent financial crisis has shown a recent trend wherein lower product demand results in operational cutbacks within companies yet in instances where demand apparently increases several companies do not hire permanent workers but rather utilize limited contractual labor of only a few months.

This is due to the current uncertainty surrounding financial markets wherein the volatility of the global economy combined with the financial recession in the U.S. and the debt crisis in Europe has created a situation where it is uncertain whether trends in increased demand will continue within the foreseeable future.

Another factor that should be taken into consideration is the fact that demand for particular products during the holiday season can be deemed as being under an “artificial increase” which does not reflect demand in previous quarters nor does it reflect the potential demand in future quarters.

As such, basing hiring practices on demand that doesn’t properly reflect consumer buying behavior in the foreseeable future would negatively impact a company’s bottom line due to the potential for having more workers than necessary when demand goes back to pre-holiday levels.

It is due to this that this paper presents the notion that by examining various aspects of the demand curve and various percentile statistics attached to it, a company will be able to determine what situation would suit the hiring of either temporary or permanent workers.

Definition

The management question in this particular case is: “Should our company hire temporary workers or hire new workers to handle increase demand for our product?” As such, it becomes a question of what specific factors contribute towards a company choosing temporary or permanent workers given a particular situation as dictated by the market environment.

Factors or Costs

Temporary demand, Seasonal demand or Popularity demand?

One of the factors that should be taken into consideration when choosing to hire new workers is whether the increased demand for a particular product is temporary, seasonal or due to popularity. What must be understood is that hiring practices differ between the kinds of demand indicated due to rates of progression and collapse.

For example, seasonal demand is defined as a marked increase in product demand as a direct result of seasonal changes (i.e., a holiday ex: Thanksgiving) wherein demand for a particular product increases (Fernández-Aráoz, Groysberg & Nohria, 2009). One example of this is the abrupt increase in demand for turkey during Thanksgiving as compared to the demand for turkey on every other day of the year.

Temporary demand, on the other hand, is defined as an increase in demand that cannot be anticipated and was brought about by an outside factor (Fernández-Aráoz, Groysberg & Nohria, 2009). One example of this can be seen in the increase in sales of the N65 breathing mask during the H1N1 scare a few years back.

The last type of demand to be examined in this paper is popularity demand, which is defined as demand for a particular type of product that isn’t a result of seasonal or temporary demand but rather is due to public perception of the product and the apparent benefits accrued through it.

One example of this particular type of demand was in the “Silly Bandz” craze a few months back wherein the popularity of the plastic bracelet for children increased to ridiculously high levels despite the product being nothing more than a shaped band of plastic.

In the case of seasonal or temporary demand there is a high degree of initial progression yet there is an accompanying rapid decrease in demand which comes shortly thereafter. In cases where this particular demand is present, hiring temporary workers is the best possible choice to maximize labor while decreasing eventual costs once demand dies down.

On the other hand in situations where the demand for a particular product is based on popularity this can result in a lengthy and prolonged period of continuous product demand and as such necessitates the need to hire more workers in order to meet the demand for the product (Fernández-Aráoz, Groysberg & Nohria, 2009).

In order to determine whether a company needs to hire a temporary or a permanent workforce it needs to examine where the increased demand for their product falls on the demand curve and adjust their hiring practices accordingly.

Severance Pay Costs

What should also be taken into consideration are the inherent differences between contractual and hired labor and the potential costs related to when demand goes down and operational cutbacks are needed. In the case of contractual labor, contracts usually run out after a predetermined level of time and should demand decrease by this point in time the company will have been able to effectively utilize a labor force and cutback when needed.

In the case of permanent hired workers, when operational cutbacks are needed there are issues regarding severance pay packages that need to be paid out and this can result in considerable costs for the company.

Debt Crisis in Europe

When deciding to hire permanent or temporary workers one of the factors that company’s should take into consideration is the European debt crisis and its potential impact on U.S. based companies. Since Europe is one of the largest markets for U.S. based products and services the debt crisis several European countries are currently experiencing has the potential to spill over and affect the U.S. economy.

As product and service demand within Europe continues to decrease this in turn affects the operations of U.S. based corporations. As such with lower European demand companies may in turn decrease their operational capacity resulting in abrupt declines in consumer spending due to the increased jobless rate.

As such, though product demand may seem high at the present it is still uncertain whether the debt crisis may get worse resulting in a subsequent spillover effect in the U.S. economy, which would be disastrous for local demand.

Outsourcing

One factor that companies should be taking into consideration is the current trend in production outsourcing wherein companies outsources several aspects of their manufacturing operations to locations such as India and China. The reason behind this is due to the relatively low cost of labor in such countries which helps to offset the production costs of a particular product.

Not only that, in such countries labor laws aren’t as stringent as compared to the U.S. and as such this enables companies to reduce operational capacities on a whim without having to pay high severance pay costs.

Taking this into consideration a company that is deciding on whether or not to hire temporary or permanent workers could always turn towards the option of outsourcing their manufacturing operations in order to further reduce costs and give them the ability to have more options in terms of changing operational capacities based on increases or decrease in demand.

Benefits Related Costs

One of the inherent problems with hiring permanent workers versus temporary ones are the inherent costs differences in terms of the benefits accrued during their period of employment. This can take the form of health benefits, life insurance, as well as deposits to a 401k plan.

In fact, when measuring the difference in amounts paid over a specific period it can be seen that it costs companies considerably more in terms of benefits to hire a permanent worker as compared to a temporary one and as such before a permanent worker is hired it must be determined whether the added costs through benefits is something the company can handle.

Worker Unions

Another factor that should be taken into consideration is the issue of the establishment of worker unions and how firing workers on the basis of cost reductions often comes with significant added costs or even can’t be performed at all due to the presence of unions within a particular company.

As unions continue to become more aggressive in their tactics in preserving the jobs of their workers this in turn creates problems for the company since in an economy where fluctuating demand curves results in necessary changes to production output unions act as “open wounds” so to speak since at time they prevent the firing of workers on the basis of lower demand and could in effect cost a company millions.

Taking this into consideration a company should think long and hard before hiring any set of workers that belong to a union since removing them from the company may become harder than the company may think.

Theory of Consumer Behavior and Market Saturation

The theory of consumer behavior explains that even if a product is popular their value diminishes to consumers after consecutive purchase and consumption. As such over a given period of time consumers will continue to purchase a product till they no longer derive any value from it and would eventually stop its consumption.

While such a theory isn’t applicable to all types of products it is applicable to several thousand and as such should be a factor that companies need to take into consideration before hiring temporary or permanent workers in that they need to determine where in the demand curve does the current level of demand lie, either at the peak or at a downward trend.

Another factor that should be taken into consideration is the concept of market saturation and how no matter how high the demand of a particular product is in a given location eventually there will come a point where market saturation occurs where all possible consumers have already bought the product.

Measurement

For Temporary demand, Seasonal demand or popularity demand the measurement for this particular factor is estimated on projected increases in demand for a particular product versus normal rates of demand and a company history of demand curves for this particular point in time of the year (Fernández-Aráoz, Groysberg & Nohria, 2009).

By utilizing this method of measurement the company will be able to compare the current projected demand curve to previous yearly data and determine whether demand for a particular product is based on a temporary seasonal increase or is a result of a period of prolonged demand which would necessitate the need to hire more workers.

In the case of severance pay, worker unions and benefits-related costs versus the hiring of contractual workers the unit of measurement is based on the amount of money lost when changes in demand curves deem it necessary to decrease the amount of workers in an operation (Fernández-Aráoz, Groysberg & Nohria, 2009).

When it comes to outsourcing this particular factor is based on the amount of money that it would normally cost to hire temporary or permanent workers versus outsourcing the means of production to another country.

In the case of the debt crisis in Europe, this particular factor is based on the amount of exposure a company has to European markets and the degree of demand reduction that would occur if an effective debt resolution isn’t reached.

Lastly, in the case of theory of consumer behavior and market saturation these particular factors are based on the amount of consumers that have bought the company’s product within a given area versus and the repeated buying behavior of consumers, which would gradually lessen the perceived value of a particular product.

Analysis

When it comes to assessing temporary demand, seasonal demand popularity demand as indicators of when to either hire temporary or permanent workers what must first be determined is the difference in increased demand as compared to what demand normal is and for how long the demand continues to remain at that particular point.

In this case if the demand for a particular product has risen to 20 to 30 percent of the norm then this does necessitate the need to hire more workers however it must be determined how long the demand will continue to remain at that particular point.

At this point in time it becomes necessary to compare past records on-demand increases within particular timeframes and to see how demand fluctuated during that previous period. If it shows that demand increased for only a short period of time and was during the holiday season then this is a seasonal demand increase and, as such, only requires temporary workers.

The same can be said for an instance where sudden spikes in demand occur yet are immediately followed by a sharp drop in the demand curve. In instances such as these demand can increase by 60% or more yet is often followed by a 70% drop in demand. This particular instance is indicative of a temporary increased demand and doesn’t necessitate the hiring of any workers at all.

In the case of an increase in demand that doesn’t fall under seasonal changes and lasts longer than previous increases in demand based on company records then this falls under prolonged (popular) demand and can be deemed a necessary period for hiring more workers.

It must be noted though that this is based on percentile increases of 40% increase or more and as such must exceed the ability of the company to properly meet demand thus the hiring of more permanent workers. In the case of the factors related to severance pay, worker unions and benefits what must be examined is the risk factor in hiring permanent workers versus just hiring temporary ones.

This is done by examining the demand curve and judging whether the rate of demand is slowly increasing or increasingly rapidly within a given period. If demand continues to increase at a rapid pace for 2 months or more without slowing down then this period can be stated as a “safe” period for hiring permanent workers (Mason & Schroeder, 2010).

On the other hand if demand is increasing within a period of two months yet is at a relatively slow and decreasing pace this can be determined as a “risky” period for hiring permanent workers since it cannot be determine whether demand will increase or sudden drop off and as such this particular period requires temporary workers (Mason & Schroeder, 2010).

It must be noted though that increases in demand for “safe” periods must increase by 30% or more within a given period while for risk y periods the demand curve will assume a slow 5% to 4% marginal increase which is indicative of demand reaching its zenith in the curve (Mason & Schroeder, 2010).

When it comes to outsourcing it becomes a question of labor costs and profit percentages; if a company has a labor cost which eats up 25% of profit yet if outsourced would only cost 5% of profits then outsourcing would be a viable replacement for either temporary or permanent labor and as such should be examined by a company based on cost savings accrued over a given period of time.

In the case of the European debt crisis what must be determined is the percentage of a company’s exposure to demand fluctuations in European markets. If 25% of a company’s market is in Europe, then it would be an implausible choice to hire permanent workers since demand may drop significantly should the debt talks result in a deadlock.

On the other hand if the company’s exposure is limited by 5% or less then if demand is increasing it may be advisable to hire more permanent workers. Lastly, in the case of the theory of consumer behavior and market saturation it all becomes a question of the amount of consumption versus the size of the population.

If the company is located within a particularly limited market then even though a particular product is popular it will eventually run the risk of market saturation and the lessening of perceived value due to the theory of consumer behavior.

As such in order to determine whether to hire temporary or permanent what must be examined is the degree of market consumption versus the current size of the population in order to see if demand is reaching a point where market saturation and marginal utility decreases. If it shows a trend in decreasing perceived value and increases in market saturation it would be best to hire temporary workers.

Summary

Based on the presented data it can be seen that the demand curve plays a crucial role in determining whether to hire temporary or permanent workers.

As such by examining various nuances of the demand curve and basing it on the percentile values given in this paper it can be determined what type of worker you should hire for your company within a given period. It must be noted though that this data set is limited in terms of its breadth and depth and, as such, requires further examination and elaboration before its usage in a real corporate setting.

Conclusion and Recommendation

Based on the data presented in this paper, it can be seen that an analysis of the demand curve versus constraining factors in the market environments proves to be an effective method of determining whether to hire temporary or permanent workers.

It is based on this that this paper recommends that for future studies examining choices of workers for particular companies it is necessary to first determine where demand lies along the demand curve in order to immediately determine what options are available for the company in terms of the types of workers that can be hired.

Reference List

Fernández-Aráoz, C., Groysberg, B., & Nohria, N. (2009). The definitive guide to recruiting in good times and bad. Harvard Business Review, 87(5), 74-84.

Mason, R. W., & Schroeder, M. P. (2010). Principal Hiring Practices: Toward a Reduction of Uncertainty. Clearing House, 83(5), 186-193.

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