Have millions of twenty-somethings dropped out of the workforce? Or are many of them doing contract work the official statistics don't count?
FORTUNE — No question about it, the graduating class of 2014 — and their nervous parents — are getting bombarded with mixed signals about the market for entry-level talent.
On the one hand, hiring seems to be picking up: The National Association of Colleges and Employers (NACE) reports that companies plan to bring on 8.6% more new grads than last year, and at slightly higher salaries, averaging $45,473 (up 1.2% from 2013).
At the same time, though, more worrisome studies say that, in the aftermath of the recession, about 1 in 10 American college graduates in their twenties have become so discouraged trying to find work that they’ve left the workforce altogether, and are neither job hunting nor in school. That grim view is based on Bureau of Labor Statistics figures showing labor force participation among 20-to-24-year-olds at about 70%, down from just over 78% before the downturn.
That would be cause for alarm, if it were true. But is it? A big chunk of the workforce these days is made up of freelancers and contract workers, estimated by the General Accounting Office to number about 42 million people of all ages. The U.S. Department of Labor projects that will grow to 65 million in the next five years. Yet federal employment statistics usually either overlook this shadow army of workers completely or mistakenly classify them as unemployed because they don’t hold traditional full-time jobs.
Plenty of contract workers are in their 20s or early 30s. That’s a clue as to the whereabouts of many of the Millennials thought to have dropped out of the workforce, of course. But it’s also, more subtly, a challenge to employers looking for skilled entry-level workers for full-time management-track jobs. Now, recruiting twenty-somethings doesn’t just mean competing with other traditional employers. It also means competing against what many Millennials see as a more flexible, more interesting way to work.
Consider, for example, Lionbridge Technologies. The firm, headquartered in Waltham, Mass., connects freelance engineers, translators, and other skilled contractors with big clients like Dell, Pfizer PFE , Microsoft MSFT , and General Motors GM who need to staff specialized, short-term projects. More than half (53%) of Lionbridge’s 100,000 contractors are Millennials. Over 90% of them hold bachelor’s or master’s degrees.
Most of Lionbridge’s freelancers, especially its engineers and other tech workers, work 30 or 40 hours a week, but often do tasks for several employers at once, says CEO Rory Cowen. He thinks the challenge and variety appeal to people in their twenties who, perhaps having seen their parents laid off two or three times, tend to balk at the idea of a full-time job at one company.
“The biggest attraction seems to be mobility,” Cowen notes. “This generation is used to doing everything on laptops from anywhere, so why not work on a laptop too?” A laptop-toting contract worker, he adds, “can spend half the year in Colorado skiing” without worrying about the limits traditional employers put on vacation days: “All the assignments are project-based, so as long as you meet your deadlines, you can make your own schedule.”
Of course, Lionbridge isn’t the only company matching up freelancers with employers for short-term gigs. Elance.com, for one, says big outfits like Google GOOG and ESPN regularly tap its huge pool of freelancers, and Freelance.com claims over 2 million contractors in its database.
Moreover, Cowen points out that the advent of cloud computing has made these services even more efficient than in the past, so that “the nature of work is changing,” he says. “People in their twenties expect more flexibility than their parents’ generation did. They also see using their skills with more than one employer at a time as a natural extension of the ‘sharing economy.’”
If the official employment figures ever start taking the nation’s freelancers and contract workers into account, it’s likely that many (if not most) of the Millennials who have supposedly dropped out of the workforce will magically reappear in the statistics. Meanwhile, for companies trying to recruit scarce talent in engineering and tech, one question: Can you build enough flexibility and variety into each job to make it more enticing than freelancing?