Paradoxically, the main way of using financial incentives to increase net labour supply of beneficiaries and move more off the benefit is to toughen the benefit abatement regime.
This increase in the abatement rates on welfare benefits for earned income moves more off the benefit and moves more into full-time employment but still with an ambiguous effect on part-time employment. Some may prefer the benefit over their current part-time job.
The notion that tinkering with financial incentives will not have large effects on labour supply and benefit numbers is not new. Increase in the generosity of welfare benefits with increase the number of applicants.
Tinkering with the details of abatement rates and thresholds has ambiguous labour supply effects because exits from welfare are still offset by new entry onto welfare. The netting the labour supply changes of these diverse groups often leads to welfare reform leading to positive but small change in labour supply. Quantitatively, an old finding is the remarkable lack of effects of financial incentives on welfare participation (Moffitt 1992, 2002).
Under a move up to a 100 per cent benefit abatement rate as shown in Figure 1; arrow 1 in Figure 1 shows that some who were working part-time will now find not working at all to be the more attractive option. The new 100 per cent benefit abatement rate reduces their take-home pay but they enjoy more leisure time.
Figure 1: the labour supply effects of an increase to a 100 per cent benefit abatement rate
Arrow 2 in Figure 1 shows that some part-time workers increase their working hours because working a little more mitigates the reduction in their take-home pay and allow some leisure time.
Arrow 3 in Figure 1 shows that some part-timers return to full-time working hours because of the revised leisure-labour trade off that now makes a somewhat higher take-home pay worthwhile despite reduced leisure time.
Whether net labour supply increases or falls after a rise in the benefit abatement rate to 100 per cent depends on the relative numbers of workers at different points on the budget constraint that are working full-time, not working, and working part-time and the magnitudes of their responses.
Some will stay as they are working either full-time, not working or working part-time. Others supply more labour. Working more hours may increase their take-home pay depending on how productivity they are.
Some part-timers will move to full-time in low paid jobs with take-home pay because of the loss of benefit income, they will enjoy less leisure time and there can be additional costs such as child care.
More productive workers in better paid jobs will take home more in pay by moving to full-time but will enjoy less leisure time. Some workers that were previously working part-time stop working and rely in welfare benefits.
If reduced welfare dependence is the objective, high abatement rates and low abatement thresholds are the path to follow. With a move to 100 per cent abatement of benefits, some leave the welfare system but no one joins it because of the higher abatement rate.
Less generous abatement will see some who claim the benefit while working part-time move to a lower take-home pay. Some will be on a higher take-home pay working full-time. The net labour supply effect is ambiguous because some leave work altogether while others work more hours.
The net labour supply depends on the relative numbers at different points on the budget constraint working full-time, not working, or working part-time and the magnitudes of their respective individual labour supply responses. Some people will stay as they are working full-time, not working or working part-time.
No one who previously did not work is worse off under the benefit abatement rate increase to 100 per cent because they are unaffected by abatement. Some who were working part-time and previously claiming the benefit take-home less but enjoy more leisure as shown by arrow 2 in Figure 1. The remaining part-time workers now take-home more pay but enjoy less leisure because they are working more hours and even full-time as shown by arrow 3 in Figure 1.
The blogs so far
To continue with my theme in my previous three blogs that zero hours contracts aren’t supposed to exist, a leading explanation for the hesitancy of employers to agree to part-time hours is team production (Hutchens and Grace-Martin 2004, 2006; Hutchens 2010).
Employers may want their employees to work a minimum number of working hours because of rigid production technologies and/or team production. Production technologies vary in the rigidity they impose on the hours worked by employees.
The co-ordination of working times is paramount to effective team production. Once the work time schedule is fixed for team, the worker faces a choice between working at the fixed schedule or working in another team or job.
Two common examples of teams are an assembly line and a football team. Both require a minimum number of workers with rigid starting and finishing times. The absence of a team member could reduce team productivity or safety or even stop production entirely.
When the cost of absence is higher such as for team production, there are more efforts to reduce absences. When a single employee absence is costly to employers, employers take steps to ensure that a minimum number of workers plus a reserve are present. There will be increased spending on monitoring, more cross-training, mutual monitoring by employees and the use of peer pressure. Multiple production lines reduce the risks of absence because spare staff can be hired to fill in across different teams.
Other workers can produce independently of their co-workers. One example is a member of a typing pool. The contribution of each typist depends on their efforts alone. The increment they add to production does not vary with the presence or absence of others, nor is the productivity of others affected by their output. If there is little teamwork, the absence of a worker does not affect other workers.
The Department of Labour (2009) found that about 60 per cent of New Zealand full-time employees did not have flexible hours.
A leading reason for employers hiring part-time workers is to solve scheduling problems that arise when hours of operation and peak periods of daily or weekly production do not easily divide into standard shift lengths.
For example, within the day and within the week variation in customer demand explains the heavy use of part-timers in restaurants, retails stores and many services outlets. Not surprisingly, zero hours contracts arise in industries such as the food services sector where there is already a long history of part-time work.
Different production technologies require their own levels of coordination and supervision. This complicates the use of part-timers. Scheduling problems can arise of workers arrive at different times.
A mix of full and part-time employees could increase supervision costs. There can be repetitions of instructions and different capabilities to perform the same tasks.
Two part-timers could be productive if job is repetitive and does not require much co-ordination. Again, and not surprisingly, zero hours contracts occur in industries where the jobs appear to be relatively simple and the worker can pretty much work out what to do after a little bit of training with little supervision.
A managerial employee is less likely to be allowed to be part-time because they will be absent when employees need direction (Hutchens and Grace-Martin 2004, 2006. Managerial employees have scale effects. Higher level management decisions percolate through the rest of the organisation. The interaction of talent and scale ensures that the impact of any loss of efficiency from having part-time managers compound geometrically into the efforts and productivity of those they lead. Sharing a managerial job has costs because information must be exchanged and a common agenda agreed.
The economics of team production suggests that zero hours contracts will occur in teams with peaks and ebbs in customer demand, where workers are pretty much interchangeable alone can take over with little or no instructional briefing, and the level of task dependency between workers is small.
When extra workers on zero hours contracts are brought on to deal with the spike in demand, they take over the servicing of this demand. There is little need for them to interact with existing workers. For example, in a restaurant situation, they could deal with the extra tables filled by the spike in demand. In a McDonald’s restaurant, for example, they could just take over that the till that was otherwise not in use and serve the extra queues of customers.
To summarise, unless we have a good idea about why firms are moving to zero hours contracts, which we don’t, and why employees sign these contracts rather than work for other employers who offer more regular hours of work, meddling in these still novel arrangements is pretty risky.
Source: Statistics New Zealand, cyclical migration scenario
Not that many years time, about 2035, there will be almost as many workers as there are young workers – those between 15 and 24. About 400,000 workers in each age bracket.
Not that long ago all, in the early 1990s, there were about 25,000 workers in New Zealand were over 65 – they could fit in a football stadium. Soon, they will equal the population of the national capital: Wellington.
Workers aged 65+ moved from accounting for 1.5 per cent of workers in 1991 to 5 per cent in 2011 and 9 per cent in 2021!
Original source of graph: Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington, Jr. Economics of Regulation and Antitrust. 2nd ed. Lexington, MA: D.C. Heath and Company, 1992, page 714.
HT: Art Diamond
Lindsay Mitchell has a nice blog today on the views of the new Labour Party spokesman on social development – the New Zealand ministerial portfolio covering social security and social welfare
Carmen Sepuloni disagrees with National Party’s policy of requiring solo mothers to look for work. She believed there should be support for sole parents to return to work, but not a strict compulsion:
It is a case by case basis. I don’t think it should be so stringent because it’s not necessarily to the benefit of their children.
The American sociologist James Julius Wilson in The Truly Disadvantaged (1987) and When Work Disappears (1996) wrote about how more children are growing-up without a working father living in the home and thereby gleaning the awareness that work is a central expectation of adult life:
. . . where jobs are scarce, where people rarely, if ever, have the opportunity to help their friends and neighbors find jobs. . . many people eventually lose their feeling of connectedness to work in the formal economy; they no longer expect work to be a regular, and regulating, force in their lives.
In the case of young people, they may grow up in an environment that lacks the idea of work as a central experience of adult life — they have little or no labor force attachment.
Carmel Sepuloni appears to believe that work is not a central expectation of adult life. Hard work used to be a core value of the Labour Party.
The toughest week of door knocking for the Labour Party in the 2011 general elections was after the Party promised that the in-work family tax credit should also be paid to welfare beneficiaries.
Voters in strong Labour Party areas were repulsed by the idea. These working-class Labour voters thought that the in-work family tax credit was for those that worked because they had earnt it through working on a regular basis. The party vote of the Labour Party in the 2011 New Zealand general election fell to its lowest level since its foundation in 1919 which was the year where it first contested an election.
When Sepuloni was on the Backbenchers TV show prior to the recent NZ general election, she was asked by the host whether she would support a $40 per hour minimum wage if that would mean equality. She did not hesitate to say yes.
Sepuloni does not seem to have noticed that wages must have something to do with the value of what you produce and the ability of your employer to sell it at a price that covers costs.
The economic literatures (Heckman 2011; Fryer 201o) and sociological literatures (Wilson 1978, 1987, 2009, 2011), particularly in the U.S. is suggesting that skill disparities resulting from a lower quality education and less access to good parenting, peer and neighbourhood environments produce most of the income gaps of racial and ethnic minorities rather than factors such as labour market discrimination.
Grounds for optimism about the effectiveness of welfare reform in overcoming barriers to employment lie in the success of the 1996 federal welfare reforms in the USA.
The subsequent declines in welfare participation rates and gains in employment were largest among the single mothers previously thought to be most disadvantaged: young (ages 18-29), mothers with children aged under seven, high school drop-outs, and black and Hispanic mothers. These low-skilled single mothers who were thought to face the greatest barriers to employment. Blank (2002) found that:
At the same time as major changes in program structure occurred during the 1990s, there were also stunning changes in behavior. Strong adjectives are appropriate to describe these behavioral changes.
Nobody of any political persuasion-predicted or would have believed possible the magnitude
of change that occurred in the behavior of low-income single-parent families over this decade.
People have repeatedly shown great ability to adapt and find jobs when the rewards of working increase and eligibility for welfare benefits tighten.
A good way to start the second part of my discussion of zero hours contracts is to focus on the economic rationale as to why they should not exist because of the fixed costs of employment. Under zero-hours contracts, employees agree to be available for work as and when it is required.
The fact that zero hours contracts do exist, and are growing in popularity, and many workers freely choose to sign onto these contracts, suggest they are an important labour market innovation with the gains of the shared between employers in terms of temporary above normal profits and higher wages.
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. On-going supervision, office space and other overheads can increase with the number of employees, not the hours they work per week. 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. Hiring one more worker for 40 hours per week is cheaper than hiring two workers to work 20 hours per week each. These two part-timers would about double the recruitment and training costs to secure the same total additional supply of hours worked per week. Profits are a small share of the revenue earned on selling the output of each worker.
A small change in non-wage labour costs can have a large effect on profit margins. One full-time employee is cheaper than two part-timers because of fixed employment costs unless hourly wages paid to the two part-times adjust to offset the additional overheads of recruiting them both.
Fixed employment costs are higher when filling higher skilled vacancies because more time and resources are spent on recruiting more skilled workers (Oi 1983a; Idson and Oi 1999). Employers interview for longer and interview more applicants to find the best possible match. The applicants for more skilled vacancies have more diverse backgrounds and their jobs are more important to the success of the firm. Employers will invest more in training recruits to more skilled vacancies (Oi 1983a, 1983b, 1988, 1990; Hutchens and Grace-Martin 2004, 2006).
Useful estimates of the fixed costs of employment are rare. An illustration of the size of the fixed costs of employment is provided by Parsons (1987). He found that the investments of an employer he studied per employee increases rapidly with skill levels. The U.S. dollar investments by the manufacturing employer he studied were $911 for a least skilled worker, $5,715 semi-skilled workers, $13,353 for first-line managers, $53,413 for middle line managers, and $113,503 for top level managers (Parsons 1987).
Fixed employment costs can explain minimum hours constraints and many other labour market puzzles. Examples are occupational differences in the stability of earnings, the uneven incidence of unemployment by skill levels in recessions, higher wages in large firms, the persistence of differential job turnover rates, overtime, joint investments in specific human capital, seniority pay and seemly discriminatory hiring and firing policies (Oi 1962, 1983a, Idson and Oi 1999).
The puzzle we are attempting to explain here is despite the fixed cost of recruiting and training an employee, the employer makes no commitment to employee this new recruitment for a minimum number of hours per week.
When a zero hours contract is in place, how is the employer to recover the costs of recruiting the employee, and the cost of initial training and orientation to the job where productivity is low?
Wages and the fixed costs of employment sum to the labour costs that their employers seeks to recoup from sale of their outputs. The higher are the fixed costs of employment, the longer are the hours that the employer will prefer the employee to work to generate enough revenue to recoup investments in recruitment and training (Oi 1962, 1983a, 1987; Hutchens and Grace-Martin 2004, 2006).
An employer often welcomes longer hours for employees with high fixed employment costs. The added output net of overtime paid contributes towards the recovery of investments in their recruitment and training (Oi 1962, 1988).
The more hours worked, the more hours over which can be spread the fixed costs of employment. When fixed employment costs are high, paying existing employees for longer hours is less expensive relative to hiring and training additional workers.
This cost differential can lead to a minimum hours constraint and the preference of employers for overtime over recruitment of more workers (Oi 1962, 1983a, 1990; Hutchens and Grace-Martin 2004, 2006).
Part-time jobs usually pay disproportionately less per hour than many full-time jobs (Hirsch 2000, 2005). Part-time workers can be more costly per hour than equally productive and qualified full-timers because their fixed costs of employment are spread over fewer total hours.
Early empirical studies of part-time work, after accounting for skill, occupation, age and other differences, found a part-time wage penalty of about 10 per cent, but more recent studies were unable to find a large part-time wage penalty (Hirsch 2000, 2005).
The more recent studies have found a small part-time wage gap for men but no gap for women after accounting for skill, occupational, age and other differences, and no much of a wage penalty for switches to or from part-time to full-time jobs in the same occupation or industry. [Rogers (2004), Booth and Wood (2006), Hirsch (2000, 2005, 2008), Manning and Petrongolong (2008) and Mumford and Smith (2009).
A major empirical finding about part-time jobs is that there are significant occupational and skills differences between full-time and part-time jobs (Hirsch 2000, 2005). These differences explain most of what are otherwise large raw gaps in hourly wages. Part-time jobs pay less because they usually require less human capital (Hirsch 2005).
Workers who have invested more extensively in human capital usually seek full-time jobs to work sufficient hours over their careers to recoup their investments in education and training.
There are part-time jobs that pay wage premiums (Hirsch 2005). These are limited to industries with seasonal and other short spikes in labour demand.
When product demand is fluctuating, full-times can be more costly because they are frequently idle. Shops, supermarkets and food outlets are examples of firms with within day highs and lows in sales and who profit from hiring part-timers. The cost savings induce these employers to pay a premium to find part-time workers.
Another reason for the lower hourly wages in part-time jobs is daily labour productivity of every workers is linked to the length of their working day. There are starting-up, planning, co-ordination and self-organisation tasks at the beginning of every working day before anything can be produced (Barzel 1973). Part-timers will produce relatively less per working day because an equally as long a part of their day is lost in starting-up costs. These fixed costs of starting the work day must be recouped over a shorter working day.
One conclusion that can be drawn here, in terms of zero hours contracts, is they should be confined to industries and jobs where the fixed cost of recruiting and training employees is low.
The firms that offer of zero hours contracts are likely to be employers subject to peaks and surges in product demand. Not surprisingly, zero hours contracts were pioneered by the retail sector, and in particular the food sector.
What can be said with some confidence is zero hours contracts are unlikely in jobs where workers must be provided with a dedicated workspace and other dedicated work tools. These dedicated resources would not be in use if the particular employee is not called in to work.
Workers on zero hours contracts must be interchangeable in terms of skills and experience and have no need to debrief each other as they change shifts. Starting-up, planning, co-ordination and self-organisation tasks at the beginning of each working day must be relatively low.
Fixed costs of employment increase with recruitment efforts and specialised training and the time spent supervising, co-ordinating and monitoring employees. Employers that hire lower skilled workers, offer less training, and which assign simple and easy to monitor tasks will incur lower fixed costs of employment (Hutchens and Grace-Martin 2004, 2006; Oi 1983a, 1983b).
Minimum hours of work constraints are more likely for skilled recruits and for those employees who have benefited from employer funded training [Oi (1962, 1983a, 1983b, 1988, 1990) and Hutchens and Grace-Martin (2004, 2006)]. Employers will invested more in finding the more skilled recruits because these workers have more specialised and they have varied backgrounds (Oi 1983, 1990, 1992; Idson and Oi 1999).
The more that is invested in training specialised to the firm, the more in fixed costs of employment that the employer must later recoup as additional employee output (Oi 1982, 1983a, 1987, 1988; Hutchens and Grace-Martin 2006). Employers are less likely to agree to requests for reduced from these types of trained employees unless their hourly pay reduction is large enough to keep recovering the fixed costs of their employment.
Employers will profit from structuring their recruiting choices and retention incentives in their employee compensation packages so that average job tenures at least break-even on investments in recruitment, training and supervision.
Longer staying employees will balance out the losses on those that quit early. Employers recoup investments in training by sharing some but not all of the added returns from the specialised training with the employee (Oi 1962, 1983a; Becker 1975). This wage premium over what the worker could earn elsewhere is a staff retention incentive that facilitates a long-term employment relationship. The longer is this employment relationship, the better are the chances for the employer of recovering fixed employment costs (Oi 1962, 1987; Becker 1964).
An employer with major upfront investments in recruitment and specialised training and from overheads from the co-ordination and management of staff has a good incentive to recruit and retain employees on the condition that they work a minimum number of hours per week. The fixed costs of employment increase with the number of workers employed rather than the number of hours they work. The fixed costs of employment for a part-timer and a full-timer will be similar.
The foregoing discussion suggests that zero hours contracts will be confined to jobs where recruitment costs are low, and training specialised to the job and firm are low. The recruit will be expected to come job ready with generalised training mobile across many jobs within their occupation and sector.
One of my puzzles about immigration is the claim that they take jobs from natives. This is the lump of labour fallacy: that there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs.
Immigration is population growth. The other method of population growth is natives of the country having children and these children growing up to enter the workforce.
No one complains about new work force entrants taking the jobs of existing workers. Somehow, no matter how fast or how slow the population may be, jobs are always available.
The baby boom may have slightly increased the natural unemployment rate simply because there were more young people entering the workforce for the first time and job shopping.
This job shopping is when newcomers to the workforce move around a lot more as they find the specific jobs, employers, occupations and industries that suit their talents and inclinations. After about 10 to 15 years of job shopping, the majority workers settle down into a particular job and occupation for a long time.
Labour supply increases through teenagers entering the workforce and migrants entering the workforce differ only in respect of the local taxpayer didn’t have to pay for their schooling.
All through human history, the labour market has been able to cope with population increases with very little drama.
The large increase in female labour force participation since the mid-20th century was handled with ease despite the predictions of the odd, angry misogynist.
Indeed, is there any difference between the arguments against more immigration and the arguments in the mid-20th century against more married women working? Both are about taking jobs are of of existing workers, who will then be thrown on the scrapheap of society and never find another job.
This massive increase in female labour force participation is a good example of how labour force surges can be handled with ease by the labour market, be they domestic in origin or through immigration. The labour market was able to absorb millions of additional married women re-entering or staying on in the workforce to work full-time.
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.