Staffing agencies and in-house bargaining

Nowadays, many producing firms do not hire workers, but rent them from “staffing agencies”, whose main activity is to find, employ, and rent out workers to producing firms. That way, producing firms do not bear the direct costs of search and instead rent workers in a competitive market. We employ standard search-and-matching theory to analyze this phenomenon, with producing firms that have decreasing returns to scale. We find that the mere presence of staffing agencies has an important impact on the bargaining between the firms and their hired, “in-house” workers: firms can strategically use rented workers to weaken the bargaining position of in-house workers, tilting bargaining in their own favor. This has first-order effects on wages and employment. If rented and in-house workers are identical in production and in search markets, the unique equilibrium is one where producing firms only use rented workers. If renting workers involve additional costs, the equilibrium features an interior solution where each firm procures workers from two sources.