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.

@nzlabour @FairnessNZ My first Parliamentary submission – opposing regulation of zero hours contracts

This Labour Party link made it very easy for me to submit to the Select Committee of Parliament to oppose the Bill on regulating zero hours contracts. I oppose the Bill for the exact opposite reasons that the Labour Party opposes the Bill.

I encourage others to make a submission to Parliament as well opposing this draft amendment that will lower the wages of workers. My submission is as follows:

I do not support the proposed changes to the legislation governing zero hour contracts in the Employment Standards Legislation Bill. There should be no regulation of zero hours contracts.

Zero hours contracts is creative destruction at work in the labour market, sweeping away obsolete working time arrangements, mostly in the retail services sector. Plenty of new ways of working have emerged in recent years that include the proliferation of part-time work, temporary workers, leased workers, working from home, teleworking and sub-contracting. Employment laws were built on the now decaying assumption that workers had career-long, stable relationships with single employers.

Advance notice of work schedules is always known only to a minority of temporary and permanent employees in New Zealand, and there’s not much difference between that advance notice between temporary and permanent employees.

Critics overplay their hand if they suggest that somehow workers are very much disadvantaged and employers are holding all the cards. Job turnover and recruitment problems are a serious cost to a business. Workers will not sign zero hours contracts if they are not to their advantage.

Unless labour markets are highly uncompetitive with employers having massive power over employees, employers should have to pay a wage premium if zero-hour contracts are a hassle for workers.

The fixed costs of employment are such that you shouldn’t expect zero-hour contracts: you’ll typically do better with one 40-hour worker over two 20-hour workers because of these costs. Zero hour contracts would be most likely in jobs with low recruitment costs and where specialised training needs are low. Workers with low fixed costs of working will move into the zero-hour sector while those with higher fixed costs would prefer lower hourly rates but more guaranteed hours. Again, read lower here as meaning relative to what they could elsewhere earn.

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, meddling in these novel working time arrangements is risky.

Employers must pay a wage premium to induce in workers to sign zero hours contracts. This Bill seeks to deny workers the right to seek higher wages.

Feel free to use the above text as the basis for your own submission to Parliament.

Are 40% of workers on zero hours contracts, almost?

Zero hour contracts may be outlawed in New Zealand–updated

In another triumph of the Socialist Left of the National Party, the supposedly centre-right New Zealand government is considering outlawing zero hours contracts:

ONE News can exclusively reveal the Workplace Relations Minister is leaning towards outlawing the contracts and other employment provisions that he sees as unfair…

The Minister of Workplace Relations said the most punitive aspects of zero-hour contracts will be banned:

Mr Woodhouse has previously said a ban of zero-hour contracts would be an overreaction, but signalled the outlawing of aspects including:

•Restraint of trade clauses that stop someone working for a competing business if an employer does not provide the desired hours of work.

•The cancellation of shifts at short or no notice.

One reason for this is to neutralise a wedge issue with the Labour Party. The labour parties in both New Zealand and United Kingdom plan to outlaw zero hours contracts.

The NZ Labour Party’s Certainty at Work private member’s bill would require employment agreements to include an indication of the hours an employee will have to work to complete tasks expected of them.

Aaron Director pointed out that there are many real world business practices that behave differently from the caricatures in textbooks and arouse suspicious responses from economists (as well as from lay observers including lay observers with no ideological agenda).

Director said that visions of market power dance their heads and some of these suspect practices have been regulated for reasons he attributed in a large part to intellectual laziness. Ronald Coase made the same observation about knee-jerk responses to perplexing new business practices:

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.

Much of the lasting influence of Aaron Director and of Ronald Coase came from their ability to show that simple judgements about business practices often cannot withstand rigorous scrutiny.

The organisation of and the contracting practices in the labour market is not a complicated despite the best efforts of the Left over Left and unions to pretend that it is so, as Richard Epstein explains:

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.

In the UK, the Work Foundation found that 80% of those on zero hours contracts are not looking for another job; only 26% wanted longer hours. This implies that 74% were content with their current work times arrangements.

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, which is a common complaint about zero hours contracts. The worker does not have guaranteed hours but must promise not to work for someone else in the same line of business.

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 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?

If there is an inherent inequality of bargaining power between the bosses and the workers, why do employers seek restraint of trade agreements against these downtrodden workers who are supposed to have few options but to accept the miserable zero hours job offer before them?

The question that must always be asked is why do people deemed competent to vote and drive cars sign zero hours contract? What is in it for them – for the worker who signs these contracts – especially for workers who already have a job and are switching to a zero hours contract? 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.

If zero hours contracts are as bad as the Left over Left claim, the job quit rates for these contracts should be high, and people moving from existing jobs should be under-represented in this section of the labour force. If a worker already has a job, they have few reasons to sign up to such a purportedly poor job offer. Show me the evidence.

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 to the officious observer arrangements is risky.

Zero hours contracts are an issue in the British general election

Another chance to remind of the farcical nature of criticisms of them. 68 Labour MPs use zero hours contracts because both parties to the contract find the working arrangements they specify to their advantage.

Who is on zero hours contracts in the UK?

Firstly, those on zero hours contracts are overwhelmingly younger people and more often women. Both groups value flexible working hours more than others. That’s why they make up the majority of workers on zero hours contracts.

Also not surprisingly, people on zero hours contracts also tend to be more often in full-time education. Another group that values flexibility in hours. Furthermore, many of those on zero hours contracts have only been in the current job for less than 12 months. Again, suggesting they come from groups that change jobs frequently, which means they can easily quit and find another job if they don’t like a zero-hours contract.

Via Zero-hours contracts in four charts | News | The Guardian

Zero hours contracts prevalence, the class struggle and the gales of creative destruction

number of zero hours contracts in UK

Source: Use of zero hours contracts rises to record levels | City A.M.

The number of workers on zero hours contracts has certainly exploded in the UK, going from about 100,000 to 700,000 in about five years. The UK data also suggests that most of these contracts will be in the accommodation and food services sector.

workers on zero hour contracts in UK by sector

Source: Use of zero hours contracts rises to record levels | City A.M.

Zero hours contracts is creative destruction at work in the labour market, sweeping away obsolete working time arrangements, mostly in the retail services sector.

Innovation is the market introduction of a technical or organisational novelty, not just its invention.  - Joseph Schumpeter

Zero hours contracts is creative destruction at work in the labour market, sweeping away obsolete working arrangements mostly in the retail services sector.

New Zealand data is hard to come by on zero hours contracts. Data on working hours arrangements is in the Survey of Working Life which is conducted every couple of years. This survey doesn’t give any data directly on the prevalence of zero hours contracts, but it does tell you how many people are temporary employees and among these, who is a casual and seasonal employee and whether they have regular hours.


Source: Survey of Working Life  December  Quarter 2012, Statistics New Zealand.

The first thing can be said about the prevalence of zero hours contracts in New Zealand is two years ago the number of workers both male and female who were casual, fixed term and temp agency workers was relatively small. Less than one in 20 male workers was a casual worker; 3% of male workers was on a fixed term or temp agency worker. For women, 6% were casual workers and 4.9% were either fixed term or temp agency workers.


Source: Survey of Working Life  December  Quarter 2012, Statistics New Zealand.

Temporary employment is most common In the agriculture, forestry and fishery sectors, which is no surprise because of the prevalence seasonal workers in that sector.The retail trade accommodation and food sectors is not the next cab off the rank for temporary employment. Temporary employment is rather common in the education and professional science sectors.


Source: Survey of Working Life  December  Quarter 2012, Statistics New Zealand.

In the retail trade commendation and food services worker, 90% of all employees are still permanent. There are about 32,000 workers in the retail trade, accommodation and food services sectors.


Source: Survey of Working Life  December  Quarter 2012, Statistics New Zealand.

Among all casual employees across all sectors, 50% work standard hours and about 10% have no usual working time. That is, out of the 92,000 casual employees in New Zealand, about 9000 of them have no usual working times, which is the equivalent of a zero hours contract. No data was published by Statistics New Zealand on fixed term and temp  agency workers because the sample sizes were too small so the data was suppressed confidentiality reasons.


Source: Survey of Working Life  December  Quarter 2012, Statistics New Zealand.

For casual, fixed term and temp agency employees, it is commonplace for them to change their hours from week to week to suit the needs of their employees. The equivalent of zero hours contracts Is commonplace among employees who do not have permanent employment status. It goes with the territory. Those who want fixed hours seek permanent employment.

For zero hours employment to become common, this form of contract in over working time arrangements will have to be come more common among permanent employees. If that is so, such a trend will make the notion of a permanent employee somewhat vague considering these employees, although permanent, are not guaranteed regular hours.


Source: Survey of Working Life  December  Quarter 2012, Statistics New Zealand.

They are a happy lot are temporary employees. Pretty much enjoy their jobs as much as permanent employees do when it comes to their job and, by implication, that perennial left-wing bugbear, the inherent inequality of bargaining power between  the bosses and the workers and the violence inherent in the capitalist system. All is not well for the class war.


Source: Survey of Working Life  December  Quarter 2012, Statistics New Zealand.

What is worse for the future of the class struggle is that these temporary employees are rather happy lot when it comes to work life balance. Just as happy as permanent employees. Indeed, temporary or permanent employment status has no effect on job satisfaction and work life balance.


Source: Survey of Working Life  December  Quarter 2012, Statistics New Zealand.

Rise up ye workers, rise up for you have nothing to lose but your zero hours contracts may have to be put on hold as the next battle cry of the class war in New Zealand. Indeed, a lot of consciousness-raising will be in store for our friends on the Left because the working class seem a rather happy lot in their jobs, slightly less grumpy than the middle class, and almost as happy as the ruling class.

capitalism rocks

Kicking in the rotted door of capitalism to bring on the permanent revolution has never been easy. Zero hours contracts just does not seem to be the new straw that will break the capitalists’ back any time soon. Workers seem to be rather happy with them or their equivalent that has been around for a long time in the labour market.

Critics overplay their hand if they suggest that somehow workers a very much disadvantaged and employers are holding all the cards. Job turnover and recruitment problems are a serious cost to a business. Workers will not sign contracts, such as zero hours contracts or casual work contracts if they are not to their advantage.

Some economics of zero hours contracts – part 4: team production as a constraint on working time flexibility

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.

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.

Some economics of zero hours contracts – part 2: the fixed costs of employment and minimum hours constraints

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.

The fixed costs of employment

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).

Recouping overheads with minimum hours constraints

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.

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