Wednesday, 4 April 2018

Zero Hour Foolishness

In recent years, many politicians and social commentators have bemoaned zero hour contracts, believing them to be a scourge on society, and calling for them to be outlawed. Outlawing zero hour contracts because a minority of people would prefer securer employment is about as dim-witted as outlawing night shifts because the majority of people prefer to work in the daytime.

The main question these politicians and social commentators never consider asking is why they think they know the zero hours contract situation better than the agents in question – where by ‘agents in question’ I mean the entirety of society’s revealed preferences.

There are primarily three groups in the zero hours contract situation:

1) Employers for whom zero hour contracts are a benefit

2) Employees for whom zero hour contracts are a benefit

3) Employees for whom zero hour contracts are not a benefit

The reason there is not a fourth group - Employers for whom zero hour contracts are not a benefit – is because such a group would not offer zero hour contracts in the first place if they conferred no benefits on the firm.

Last I heard, out of the 3 groups, groups 1 and 2 make up a huge majority – that is, most people (employers and employees) involved in a zero hour contract agreement find it beneficial. So effectively what our illiberal foes above wish to do is outlaw something that a majority find beneficial for the appeasement of a minority who simply prefer to have more regular and stable contracts.

I won't get into what should be the obvious reasons why even a total ban on zero hour contracts won't make current unstable contracts more stable; nor will I get into why such a completely unnecessary and oppressive law would cause harm to groups 1 and 2 by prohibiting a mutually beneficial relationship to which they are both tacit signatories.

But what I will say is - it should be evident that there are plenty of reasons why people might be on zero hour contracts, yet simultaneously no reason to ban them. It’s one of the biggest mistakes people make, acting to represent a small group without understanding all the conditions under which those outcomes came about.

For the vast majority, the labour market of supply and demand involves a mutual allocation of resources (work and wages) far beyond the scope of any top-down management, and with far more efficiency than arbitrarily introduced state-meddling can achieve. Telling employers they must offer a regular contact based on the whim of political ideologues can only harm the qualities of mutually allocated resources.

Here's what's being missed with alarming short-sightedness. Yes, some people struggle on zero hours - the part of the labour market that contains much of this kind of work is often insecure, unstable and volatile anyway - but the notion that outlawing it will make things better is moonshine.

Here's the key point. The labour market of supply and demand is dictated by the numerous price signals that generate all kinds of information about the value of labour, the supply of services, length of contracts, and so forth. A dentist can work in the same place for 15 years doing a similar number of hours each day. A sub-contracted painter and decorator can work at dozens of places in that time, with varying lengths of contract. Selling labour is not homogenous, it is heterogeneous - and you're just not going to be able enforce better pay or more stability without damaging a whole sub-section of people in that labour market.

It's common to think of zero hour contracts only in terms of employees, and to imagine most employers to be cold, uncaring exploiters. But it distorts the true reality. Economic policies affect employers as well as employees - and employers are the essential providers in this equation. Make a law that helps low earners and you hinder another group (usually low-skilled employers but also other low earners). Make a law that helps tenants and you hurt another group (usually landlords). Make a law that purports to help a minority on zero hour contracts and you hurt pretty much everyone else, while probably robbing many others of casual work.

Employers have lots to consider when they take on people. They have to make forecasts about the future; they have to consider market fluctuations; they have to consider what they should invest; and they have to consider which future state-interference will hamstring them. Zero hour contracts are sometimes opportunities to exploit, but they are mostly opportunities to reduce risk in a frequently unstable market, and create lots of short-term employment that most employees value.

Think who the beneficiaries of zero hour contracts might be - students, single parents, those looking for additional employment to top up their main job, and those with multiple part time jobs. The ability to work flexibly as and when they want is a very beneficial thing for them. Those who look to ruin theirs and their employers' flexibility are narrow and myopic.

Economic growth and competition are the main vehicles that will reduce zero hour contracts for those not happy with them. The reason being, job growth increases the necessity for employee stability, which will only diminish the allure of zero hour contracts for both employers and employees, because employers are going to want stability in their personnel.

Moreover, as unemployment rates fall and job creation continues to take place, greater power is transferred to jobseekers, which places selection pressure on firms offering less-desirable contracts. Ironically, proposals to ban zero hour contracts, or impose arbitrary restrictions that have been plucked out of the air, will uproot some of the stability in the market, which will more than likely go on to have a cobra effect type scenario - the very opposite of what we are told they are trying to do.