McDonald’s Workers Just Lovin’ Their #ZeroHoursContracts @suemoroney @IainLG @FairnessNZ

Revealed preference rules. Not only do about half of unemployed turned down offers of zero hour contract jobs, those that switch from a zero hours contract to minimum hours are not much different from the number of people in these type of jobs who would be quitting to another job anyway.


Source: McDonald’s Workers Are Just Lovin’ Their Zero Hours Contracts – Forbes and McDonald’s offer staff the chance to get off zero-hours contracts | UK news | The Guardian.


How to argue against employment protection laws while arguing for additional employment regulation

The Centre for American Progress recently published an excellent survey of the costs to employers of hiring and training new recruits. As the paper notes:

it is costly to replace workers because of the productivity losses when someone leaves a job, the costs of hiring and training a new employee, and the slower productivity until the new employee gets up to speed in their new job.

Our analysis reviews 30 case studies in 11 research papers published between 1992 and 2007 that provide estimates of the cost of turnover, finding that businesses spend about one-fifth of an employee’s annual salary to replace that worker.

The purpose of the research published by the Centre for American Progress was to argue there were large costs to employers from replacing even low paid workers and there are a workplace policies such as paid family leave and workplace flexibility will reduce these job turnover costs to employers.


Similar arguments are used to justify a living wage on efficiency grade wage grounds. A living wage would reduce job turnover and therefore the costs to employers of job turnover in the jobs.

The research published by the Centre for American Progress also illustrates the bargaining power of workers. Employers who failed to treat workers fairly and pay them the going wage risk an increase in job quit rates. These large costs of job turnover have been carefully documented by the Centre for American Progress.

Employers incur fixed costs of employment when they recruit and train new employees. These recruits must be expected to stay long enough to work sufficient hours for the firm to expect to recover these investments (Oi (1962, 1983a, 1990), Idson and Oi (1999), Hutchens (2010), Hutchens and Grace-Martin (2006)).

These costs are fixed costs because they do not vary with how many hours the employee works or with how long an employee stays with their employer. These fixed employment costs must be recouped over the expected job tenure of the employee with the firm. Employers will not hire an additional worker unless they anticipate recovering the costs of doing do including fixed employment costs and other overheads.

Central to arguments such as by Richard Epstein for employment at will is the threat of the employee to quit imposes a real cost on employers which the employer will seek to avoid by treating their employees well.

The best way to prevent exploitation of workers is to make hiring and firing easy, facilitate new entry by firms into all markets and promote full employment – a worker with other available job opportunities is difficult to exploit.

With large fixed costs of recruitment and training, employers cannot afford to behave whimsically if they wish to survive in competition with the rival firms with more competitive wage and employment policies.

By the same token, the large fixed costs of employment documented by the Centre for American Progress illustrate the large investments employers must risk to recruit a new employee.

If this large investment in recruitment doesn’t turn out well, but is difficult to get out of because of strict employment laws, employers will be more reluctant in the first instance to risk this investment because they are risking several months wages in fixed costs of employment. As Richard Epstein explained:

A second great advantage of the at-will system is that it supplies an informal method of bonding that keeps both sides in line.

The employer who tries to take advantage of the employee by altering working conditions for the worse will be met by the threat to quit, for now the deal is worth less to the employee than the wage received.

So long as markets are competitive the switching costs will be relatively low – lower in fact than they are in a highly regulated world where employers have to think twice before taking on a worker whom they may be unable to fire if things do not work out.

Yet on the other side, the employee who takes it easy on the job is faced with dismissal because he is no longer worth his wages.

But even here management will hesitate to dismiss for good reasons. One is the very substantial costs of recruiting and training a replacement who might or might not turn out to be better than the worker who was dismissed. The second is that unjust dismissals could induce other workers to leave while the going is good, thereby compounding the problem of recruitment and retention.

The Centre for American Progress was good enough to document the very substantial costs of recruiting and training a replacement employee. As the Centre for American Progress explained in their paper, employers have every reason to protect their investments in training and recruitment by minimising job turnover costs.

Some economics of zero-hours contracts – part 3: the fixed costs of working

The Unite Union, which represents about 7000 workers across New Zealand, has announced a campaign against zero-hours contracts. Zero-hours contracts have no specified hours or times of work so a worker could end up working 40 hours one week and none the next.

Unite national director Mike Treen did not know of the specific numbers of such contracts, but said these contracts were particularly common in the fast food industry, although they also appeared in some other industries.

Unite Union’s national director said that zero hours contracts made workers vulnerable to abuse as they became too nervous to speak out, for fear of having their hours reduced.

There’s no security and it puts enormous power in the hands of managers. People are extremely reluctant to assert their rights for simple things like breaks…

Treen admitted that zero-hours contracts gave employers flexibility, but pretended to know that the amount of flexibility employers actually needed was often exaggerated.

It’s not like they have huge swings or anything. They know how much they are going to sell on any particular day of the week during the year… We don’t expect everybody to have guaranteed hours but 80 per cent of the crew should be able to have it.

Treen said the union was not planning to push for a law change at this stage and would focus on addressing the issue during negotiations with fast food companies early next year.

The new leader of the opposition has promised to outlaw these zero our contracts when he gets into government. I wish him well in drafting a law that outlaws zero-hours contracts without outlawing some part-time and casual jobs as well.

 Zero-hours contracts and the class war

As is to be expected, the Guardian is rather hot and bothered about zero hours contracts. One of its columnists referred to those on zero-hours contracts as the new reserve army of the unemployed:

It is a pity Karl Marx was not around last week to comment on the news that 90% of the workers at Sports Direct are on zero-hours contracts.

The author of the Communist Manifesto would also have had plenty to say about the news that the official estimates of those working in this form of casualised labour had shot up by 25%…

It is safe to say Marx would have cavilled with those who see zero-hour contracts as an expression of Britain’s economic strength, a demonstration of flexible labour markets in action.

He would have thought "reserve army of labour" a better description of conditions in which workers were expected to be permanently on call for an employer.

The Guardian went on to admit that the reserve army of unemployed are not as discontented as they should be:

It’s only fair to say that some employees are content to be on zero-hours contracts.

Some students, for example, want to combine work with study and are willing to turn up when summoned. That’s also true of older workers topping up their pensions with a bit of irregular, part-time work.

Despite this, the class war continues as does the immiseration of the proletariat and the long-term decline in profits that will lead to the crisis in capitalism and, with a bit of luck, the inevitable proletarian revolution:

Marx would have seen zero-hours contracts as the continuation of a long historical trend, stretching back to the mid-1960s when the profitability of western manufacturing firms started to fall.

From that moment, he would say, the search was on for measures to boost profits, and this has manifested itself in a number of ways: by direct attacks on organised labour; by the increased financialisation of the economy; by the search for cheap raw materials whatever the environmental cost; and by asset bubbles.

Accordingly, zero-hours contracts are the response to tougher conditions facing firms as a result of the financial crisis.

Reversing that trend will require more than legislation: it will mean tackling one of the root causes of that crisis: the imbalance of power in the labour market.

A more mellow writer in the Guardian brought up the imagery of the interwar depression:

Of course it is difficult for employers to match the demand to work nine to five and yet also to be served on a 24-hour basis, cheaply and effectively by someone, not them.

But there are other ways to solve this conundrum than indenturing workers or making them wait at the metaphorical factory gate for a tap on the shoulder.

The fixed costs of working

I will start my third blog on the economics of zero-hours by reviewing the economic literature on the fixed costs of working. Helpfully, this literature predicts that zero hours contracts really shouldn’t exist much at all.

The literature on the economics of the fixed costs of work arose out of the economics of retirement and the economics of the labour supply of married women, and in particular of young mothers. This literature was attempting to explain why older workers, or young mothers either worked a minimum number of hours, or not at all.

Fixed costs of working constrain the choices that older employees make about how many hours and days that are worthwhile working part-time. For employees, the fixed costs of going to work limit the numbers of days and number of hours per day that a worker is willing to work part-time. The timing costs of working at scheduled times and a fixed number of days per week can make working fewer full-time days, rather than fewer hours per day less disruptive to the leisure and other uses of personal time.

The fixed costs of working induced older workers to retire completely, and young mothers to withdraw from the workforce for extended periods of time, unless these workers worked either full-time or enough hours part-time each day and through the week to justify the costs of commuting and otherwise disrupting their day and week.

In the case of older workers, there were the fixed costs of commuting and other disruptions to their day. In the case of mothers, there are additional fixed costs of working arising from child care and the commuting and other rather rigid time commitments of picking up and dropping off younger children at school and to day care centres.

The fixed costs of going to work

There is a minimum number of hours of work that will be supplied by different workers that is set by the fixed costs of working. These fixed costs of work arise from commuting time and from dressing and other tasks involved in preparing for the trip to work. These costs are fixed because they do not vary with the number of hours to be worked per day and the amount of effort to be exerted while working (Cogan 1981; Hamermesh and Donald 2007).


A worker will not accept a job offer or continue in a particular job unless they work sufficient hours so that these fixed costs of going to work are recovered along with receiving sufficient reward for giving up pursuing other job openings open now and in the future and for forgoing leisure and the option of making other uses of their time (Cogan 1981; Hamermesh and Donald 2007).

Cogan (1981) estimated that the average fixed time and money costs of married women entering the workforce was 28 per cent of their earnings, and also estimated that the minimum number of hours a married woman was willing to supply in the labour market was 1,300 hours per year.

There may be a preference for fewer working days over fewer hours per day to reduce the time and money costs of going to work. Donald and Hamermesh (2009) estimated that fixed costs of going to work are equal to about 8 per cent of income. The fixed costs of working provide an incentive to workers to bunch activities.

The fixed timing costs of labour market entry

A surprisingly large part of the fixed costs of working comes from disruption in the ability to use spare time effectively (Donald and Hamermesh 2009, 2007). Entering or remaining in the workforce for any time at all significantly affects the effective allocation and enjoyment of time outside of working hours. This disruption to the effective use of the time that is left outside of working hours is the fixed timing cost of labour market entry.

One way to reduce this disruption from entering the labour force at all is to seek to reduce the number of days worked per week rather than the number of hours per day.

Leisure and other private uses of time are displaced if the individual takes or stays in even a small part-time job. Workers must use their reduced amount of remaining free time to catch-up on tasks, often at the weekend that they could have done if they were not working.

Leisure time may be the first to go because many personal tasks can be rescheduled but must be done eventually. These range from cooking, eating, and cleaning to personal upkeep, sleep and rest. Tasks must be hurried or done to a lower quality (Donald and Hamermesh 2009).

Routine – having the same schedule from day to day – saves time (Hamermesh 2005). Routine enables people to economise on the set-up costs of consumption, leisure and going to work.

Entering the work-force for any time at all to work even a small number of hours per day or per week calls for new daily and weekly routines and disrupts many existing routines that make better use of leisure, family and other uses of time (Hamermesh 2005).

Entering the workforce constrains the unfettered use of spare time. Working increases the fixed costs of coordinating family and leisure times. Workers must surround working times with buffers to ensure they are not late for work.

One reality of rising incomes is time become more valuable. A rise in wages raises the value of time because time is a finite and irreplaceable resource. Time cannot be stored or bought and sold but people can try and make better use of it.

With only 24 hours still in every day, the cost of time-intensive activities including working will rise as incomes increase. People shift away from time intensive activities and buy more of those products that are time saving or which are less time intensive to consume. Time is money and this maxim applies with greater resonance as incomes and wealth increase.

Another important fixed time costs of labour market entry is its impact on the efficiency of the remaining time devoted to leisure, household production and other activities when even a small amount of market work is undertaken. Spare time is of much less value if part of every day is to be spent at work.

Fixed timing costs arise because of a need to hurry to get to work on time and forego other activities to be rested for work the next morning. The requirement to attend work blocks out certain days from major other uses of that day and reduces the time available in any day of part-day work for leisure, family time and household production.

Household production refers to the goods and services made at home which could be purchased in the market from a third-party. These include food preparation, cooking, carer obligations, and household cleaning. There are also various other household tasks that must perform for one-self which are essentially personal maintenance and leisure.

Working even a few hours can reduce the worker’s efficiency in household production and other non-market activities and may require the worker to buy goods and services that were previously produced at home. This reduces the net financial rewards of working. Fewer full days of work, rather than fewer hours per day is less disruptive to leisure and the other uses of personal time.

The fixed time costs of market work might induce workers to engage in different mixes of other activities. The additional hours of work during the week affect the allocation of time on a non-working weekend day. They reduce leisure time on weekends and increase weekend time devoted to household production by those who do market work on week days. Workers catch up at the weekend on the household production that the rigidities of their market work prevented them from doing during the week.

Stress is an important fixed cost of working. Workers spend non-market time worrying or thinking about work-problems. Even a few hours of market work will place a worker at risk of some stress.

Floors and ceilings on the structure of the working week

The fixed costs of going to work and the fixed time cost of labour market entry both place constraints on the willingness of workers to accept a job offer involving a zero-hours contract. These contracts must offer something extra over competing job options.

The employer must offer something extra to prospective recruits to induce them to sign a zero-hours contract. There must be something substantial to overcome both the fixed costs of work, such as commuting, and the less obvious but still substantial fixed costs of labour market entry.

Any commitment to work, such as working on a zero hours contract, carries with it significant costs in terms of disruption to the rest of the day, the rest of the working week and the amount of the weekend that is spent on leisure versus resting from work and catching up on tasks that otherwise could have been done during the week but for work commitments.

A zero-hours contract must pay enough over the expected life time of the job to make up for the costs of going to work as well as the disruption and loss of leisure time and also the pure disutility of working before the worker breaks even on working.

As the Unite Union official noted, zero hours contracts appear to be most prevalent in the fast food sector. Job turnover rates in the sector can be several hundred per cent per year.

Many of the workers in the fast food sector, as the Unite union official himself noted, are young. Teenagers and young workers changed jobs frequently, particularly those who are studying part-time or full-time work, injuring the summer.

As such, zero-hours contracts in any particular job will have a short expected life over which the teenager or young worker would have to recoup for the fixed cost of working and the fixed cost of any labour market entry. Employers would have to offer some sort of premium or other implicit guarantee of regular work to induce prospective young recruits to sign a zero hours contract.

The type of workers who will profit from signing a zero hours contracts of those workers with few other demands on their time and flexible days. The workers who might find zero hours contract appealing will be those who do have much routine in their day. Workers who have a considerable amount of routine in their day such as because of family commitments will not find the wage offers in zero hours contracts appealing.

There will be job sorting: workers who have low fixed costs of working and low fixed costs of labour market entry will be attracted to zero-hours contracts.

Employers profit from offering zero hours contracts to workers who don’t want to make a regular commitment to come into work every day. Teenagers and students fall into this category, which makes it less surprising that zero hours contracts appear to be most common in the fast food sector.

There are mutual gains in the fast food sector to both employers and workers from zero hours contracts when there are peaks and troughs in product demand, and some teenagers and young workers have a low cost of coming into work at short notice.

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