Establishment of a temporary workforce transaction mechanism using a real option approach

Abstract

To reduce labor costs and enhance profitability, many modern businesses have begun to employ temporary labor. Temporary labor not only helps businesses by providing necessary manpower during the busy season, it can also help businesses reduce labor costs during declining economic conditions by outsourcing labor. To address the need for flexibility in labor supply and extend the time needed to make labor decisions, this study presents the innovative concept of real options on temporary workers. The purpose of such options is to hedge the demand-supply uncertainty in future labor and wages. This study not only introduces the concept and method of real options on temporary workers but also provides real-life empirical samples to verify the reasonableness, applicability and practicability for issuing real options on temporary workers. Key words: Temporary workforce, Stackelberg model, Real option.