Hello readers, welcome back to my blog on interesting economics news stories of the week. Last week, I discussed why oil prices are so volatile and how oil in economics terms, has the power to start wars, transform countries from being poor to rich, cause inflation, as well as ‘fuel’ globalization and transportation across the globe. This week, I will be discussing whether or not zero hour contracts should be made illegal. As many of you will have seen in the news, there has been much controversy about these types of contracts and how damaging they really are on the lives of everyday people. Thousands of workers are complaining about how unfair it is not to be given guaranteed hours and many are worrying about paying bills each month and struggling to make ends meet. In fact, large established retailers such as sports direct have recently been in the news about this and their name has become perhaps the most associated with zero hour contracts in the UK. In addition to this Sports Direct was found paying workers below minimum wage. The BBC a few weeks back created a video where the image of Britain’s 22nd richest man, Mike Ashley CEO of sports direct arriving in a helicopter to work was juxtaposed with the image of thousands of workers in poor conditions, with low wages and unreliable hours.
Thankfully sports direct have responded to this and have decided to offer workers a guaranteed 12 hours a week. That being said 12 hours a week is not enough but at least it’s better than no work at all. The question now, is why don’t all retailers that still use zero hours follow in the same footsteps and should these contracts be made illegal by the government? Are there actually any economic benefits to zero hour contracts? And why do employers seem to like them so much?
In today’s post, I hope to be able to answer some of these key questions and explain the fundamental economics behind these contracts. I will try and keep it concise and to the point but include enough detail so that you become an expert on this topic. If you are intrigued to find out more, keep reading on and hopefully it will become much clearer to you. As always if you have any questions, please post them below and I will try to respond to them. Alternatively, you can send them directly to my personal email firstname.lastname@example.org
What exactly are zero hour contracts?
Before we get started, we might as well define what we mean by zero hour contracts and explain how fixed term contracts differ in contrast. Many of us may have heard the term but don’t actually know what the main differences are.
The fundamental difference is that zero hour contracts, don’t stipulate the number of hours staff should work. In other words one week you could be working 40 hours and another you could be working 0 hours, as employers aren’t obligated to offer any work at all in a given week. Equally, employees have the right to refuse any hours they’re offered if it does not suit them; however, the types of jobs involved in this sector are relatively low paid and often workers need all the hours they can get. Secondly, employees are only being paid for the hours that they work and not for sick pay or holidays and pensions. Workers in many cases are unable to take on other work, as they are obliged to be available for work at the drop of a hat. In addition, this high level of insecurity comes with the risk of bullying, and stress. Workers on these contracts don’t have the same employment rights as those on traditional contracts. Employers could even take advantage of zero hours workers by offering more work to favoured, employees and fewer to those less favoured and if employees refuse hours the employer is under no obligation to offer them future work.
According to the Office for National Statistics, more than 900,000 people in the UK claimed to be on zero hours contracts during the three months to the end of June, up 21 percent year on year. Sports direct used to employ 20,000 staff on zero-hours terms, although they have recently changed their terms. The Guardian also established that Buckingham Palace, the royal family’s London residence, hires workers using this method.
These figures are likely to underestimate the reality of the number of zero hour contracts out there, as it was found that many people do not even know they are on them!
So what’s the big deal then?
- Workers are not able to’ bank’ on receiving a set amount of pay, making it difficult for them to plan their finances or to purchase ‘big ticket’ items like a house or a car.
- This can create a number of health issues such as stress and anxiety. Wondering whether the rent can be paid this month or the grocery bill. These are just a few of the issues that workers on these contracts face every day.
- According to some behavioural economists, ‘there is no doubt that the endless worry caused by economic uncertainty impedes the bodies immune system and consequently you get sick more’. It can also mean that people start making bad decisions and they are not as productive.
- It is the taxpayer who is footing the bill to maintain an underpaid and exploited workforce
- Working a zero hour contract means that you’ll miss out on benefits that full-time or permanent employees will get as standard, such as a pension and redundancy rights. This can leave you feeling extremely undervalued, especially if you are working to the same level as those with extra company benefits.
- Constantly on-call – Not knowing when you’ll work can make you feel restricted, especially if you are balancing more than one job, or if you have other responsibilities such as picking the kids up from school.
- Damaging to your social life – If you don’t want to miss out on work from your employer, you may find yourself waiting at home and turning down your normal social activities.
- The rising costs of living caused by inflation together with no increase in wages mean that people’s real income has decreased. Being on a zero hours contract means that this effect is exacerbated, as there is no steady cash flow and you are unlikely to have savings to rely on.
Can zero hour contracts ever be good?
As with anything, there are almost always two sides to the situation and so yes there are actually a few benefits to these contracts.
In an article by the guardian, it said that: ‘they make perfect sense’. This is because “people get paid for exactly what they do, and for the time to do it. Anyone who questioned that principle is implying some of us should be paid for nothing. What’s more, in our dynamic and swiftly moving the economy, the number of hours that an employer requires can ebb and flow over a week, a day – even during a five-hour shift. Sometimes a bar, for example, might be heaving. Other times empty. It would be unreasonable on that basis to expect businesses to promise fixed hours to its workforce”.
The Article also said that: “Using zero-hours contracts is a way of offering a service – or offering a better or wider service – to consumers or other businesses without adding the significant fixed costs incurred by employing people on permanent contracts, or paying overtime, or incurring costs and administrative burdens infrequently recruiting and dismissing people in line with demand. In many cases, this would make the service commercially unviable. Zero hours contracts are therefore an essential tool for some businesses.”
- Flexibility – If you are faced with a request to work a shift that isn’t worth your while, then you can just turn it down. This pro can quickly turn into a con though if you consistently refuse to work and could put your zero hour contracts in jeopardy.
- Free time – As you won’t be working long hours over the week you can use your free time for self-development. If you don’t have the necessary skills to pursue a new career or just want to learn valuable skills, which could lead you to a permanent job.
Do they make sense economically or should they be phased out?
Zero hour contracts seem to be excellent for many employers, and good for students or workers who don’t like to have a fixed contract, although it is clear that for those who are struggling to find work and need a regular income this is a very damaging form of employment. As seen with sports direct workers have little control and they fear that if they do in a sense speak up for themselves they may not get any work at all. They are therefore being exploited by companies and I believe that they should be banned. How can someone who has a family and has regular bills to pay be expected to live on these contracts? It also makes employment stats misleading. We hear all over the media that the UK is at an all-time low, with unemployment at around 4.8%.This is actually misleading, as although people may be employed on paper, they are actually under-employed and this does not benefit the economy.
As mentioned earlier, they are actually costing the taxpayer more money from benefits and NHS dependence. The key success is employment whereby workers are paid decent wages as this will lead to higher living standards and reduced pressure on services.
In summary, I believe that the negatives associated with zero hour contracts simply outweigh the positives.
These contracts were outlawed in New Zealand in March 2016 and many campaigners would like that example to be followed here in the UK.
Here are some useful images which explore many of the ideas discussed this week:
Thanks for reading. rsira-economics.com would like to wish you a very happy and prosperous New Year!