Some economics of zero hours contracts – part 1: concepts, definitions and initial puzzles

Unions say New Zealand employers are following trends overseas and adopting zero hour contracts: workers have to be available for work, but have no hours guaranteed. Unite Union national director Mike Treen said:

McDonald’s, KFC, Pizza Hut, Starbucks, Burger King, Wendy’s – all of the contracts have no minimum hours, and so people can be – and are – rostered anywhere from three to 40 hours a week, or sometimes 60 hours a week, and it depends a lot on how you get on with your manager.

No official figures are available on the number of people on zero hour contracts in New Zealand, but they are are available in the UK in the chart below. About 250,000 workers in the UK work on zero hours contracts.

These workers agree not to work for anyone else, but are not promised regular work at all with their new employer.

The question that must always be asked is why do people who are deemed competent to vote and drive cars sign zero hours contract? What is in it for them? David Friedman asked this question about the economics of restraint of trade agreements for employees:

…the employer who insists on an employee signing a non- competition agreement will find that he must pay, in additional wages or other terms of employment, the cost that the agreement imposes upon the employee, as measured by the employee and revealed in his actions.

It follows that the employer will insist on such an agreement only if he believes that its value to him is greater than its cost to the employee…

The contract is designed, after all, with the objective of getting the other party to sign it.

If I am designing the contract and offering it to many other parties, that may put me in a position to commit myself to insisting on terms that give me a large fraction of the benefit that the contract produces.

But it is still in my interest to maximize the size of that net benefit-which I do by only insisting on terms that are worth at least as much to me as they cost the other party.

The inherent inequality of bargaining power between employers and workers and the reserve army of the unemployed must not be all that they are cracked up to be these days if low paid workers have to sign legally enforceable restraint of trade agreements.

Obviously, the few members of the reserve army of the unemployed lucky enough to have a low pay, insecure job that offers no regular hours today have so many other job options that their employers must get them to agree not to quit and job-hop at will. Jobs must be readily available  to low paid workers for otherwise why do employers insist on this restraint of trade in employment agreements.

Why do workers sign these contracts, which can include a promise of exclusive services – not working for other employers? Several subsequent blog posts will attempt to answer this question

The inherent inequality of bargaining power between employers and workers doesn’t work too well here because  the worker is accepting this job as compared to these other options , which may include employment in an existing job.

Once a worker is on-the-job and has accumulated job specific human capital, issues of post-contractual opportunism come up on both sides.

An important function of the employment contract is to prevent attempts to renegotiate terms and conditions once one side of the other has committed to the relationship and will find it costly to go elsewhere.

Zero hours contracts are negotiated upfront, which makes them unappealing to anyone already has a job, unless the terms and conditions of a zero hour contract, including the wages paid are much more appealing than officious observers make out.

Richard Epstein made this point about the general operation of the labour market, which is of relevance to our search to the answers to the questions posed by this blog post:

Labour markets are not characterized by tricky externalities. They do not pollute streams or require the creation of public goods. They are not characterized by genuine breakdowns in information, as workers are in a position to observe the conditions of their employment on a day-to-day basis.

Left to their own devices, without explicit support from union activities, they will be highly competitive, and thus work hard to allocate scarce human capital to its most productive use.

Workers have the option to quit for higher wages, and employers can always seek out low cost techniques to reduce their labour costs.

Any short-term dislocation for firms or individuals is more than offset by the overall increase in the system productivity, spurred in part by clear signals that should increase investments in human capital.

Zero hours contracts are a new labour market phenomena . That is no reason to automatically default to monopoly explanations for their emergence, including their emergence in a highly competitive industries and highly competitive labour markets where  employees change jobs regularly.

As Coase said in the context of industrial organisation as a whole and novel business practices in particular:

One important result of this preoccupation with the monopoly problem is that if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.

The next blog post arises out of my first exposure to the labour economics of working arrangements. Specifically, how the fixed costs of employment and the fixed cost of going to work  both lead to minimum hours constraints in most employment contracts.

Most of what I know about the  labour, personnel and organisational economics of working arrangements  was about explaining  why employers would expect an employee to work as a minimum number of hours if they were to employ them at all. Always good to start with explanations as to why zero hours should not exist, but they clearly do.

Subsequent blog posts will discuss zero hours contracts in the context of the team production and organisational architecture; and zero hours contracts, equalising differentials and job sorting.

Sam Peltzman radio interview

Deirdre McCloskey on capitalism, socialism and competition

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Israel Kirzner on the sole exception that justify competition laws and the regulation of network industries

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The Effective Decision – Peter Drucker

1. Classifying the problem. Is it generic? Is it exceptional and unique? Or is it the first manifestation of a new genus for which a rule has yet to be developed?

2. Defining the problem. What are we dealing with?

3. Specifying the answer to the problem. What are the “boundary conditions”?

4. Deciding what is “right,” rather than what is acceptable, in order to meet the boundary conditions.. What will fully satisfy the specifications before attention is given to the compromises, adaptations, and concessions needed to make the decision acceptable?

5. Building into the decision the action to carry it out. What does the action commitment have to be? Who has to know about it?

6. Testing the validity and effectiveness of the decision against the actual course of events. How is the decision being carried out? Are the assumptions on which it is based appropriate or obsolete?

via The Effective Decision.

State owned enterprises continue to be a bad investment for the NZ taxpayer

In a Briefing to the Incoming Minister just released, the Treasury said that in 2013, total shareholder return from state owned enterprises to the taxpayer was just 3 per cent. This is a little bit better than leaving the money in the bank.

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Note:  KiwiRail is excluded because of significant changes in its valuation methodologies over the past few years, including the significant write down in its asset values in 2012. . Total shareholder return for 2012 has been restated to include Solid Energy.

KiwiRail lost $248 million in 2013, after a $174.4 million loss a year earlier. Solid Energy lost $182 million last year last year. This $182m loss follows a $335.4m loss in the June 2013 year and a $40m loss the year before that.

Here’s what’s not sustainable: organic farming » AEI

Organic farming might work well for certain local environments on a small scale, but its farms produce far less food per unit of land and water than conventional ones.

The low yields of organic agriculture—typically 20%-50% less than conventional agriculture—impose various stresses on farmland and especially on water consumption.

A British meta-analysis published in the Journal of Environmental Management (2012) found that “ammonia emissions, nitrogen leaching and nitrous oxide emissions per product unit were higher from organic systems” than conventional farming systems, as were “land use, eutrophication potential and acidification potential per product unit.”

via Here’s what’s not sustainable: organic farming » AEI.

Kirzner on resource ownership as the only non-regulatory barrier to competition

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Israel Kirzner on freedom of entry as the sole condition from competition in a market

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Must R&D be sacrosanct – beyond question?

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Are boffins in lab coats bit players in the game of innovation?

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Claudia Goldin on the main cause of the gender wage gap

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Policy bubbles alert: there is such a thing as too much innovation

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R&D is a small part of successful innovation

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Venturesome consumption is central to innovation

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