Incomplete information and the lag between temporary and permanent employment adjustment : a cross-city analysis

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It is well-observed that the growth of temporary help service (THS) employment tends to lead that of total employment over business cycles. Such a tendency, however, varies vastly across geographic areas. This paper provides an explanation to such variations from the perspective of information environment. A firm can observe only overall demand shocks and cannot contemporaneously distinguish long-lived shocks (e.g., business cycle shocks) from transitory shocks. The information environment the firm faces can be characterized by the average volatility of transitory demand shocks and that of long-lived demand shocks, which determine the degree to which the firm can infer the nature of an observed shock. Our empirical findings show that a city with the greater volatility of transitory shocks has a longer lag between the permanent and temporary employment growth, if the timing of transitory shocks differ sufficiently across industries in the city. This possibly reflects that the greater volatility of transitory shocks makes the information contained in a contemporaneous shock noisier and makes firms to postpone adjusting permanent employment level in responding to the shock. In contrast, the greater volatility of long-lived shocks shortens the lag, possibly because it allows firms more readily identify the nature of the contemporaneous shock.

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  • Keio business review

    Keio business review 53(2018) 1(1)-26(26),

    Society of Business and Commerce, Keio University

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