The cost of flexibility
Nigel Williams, 8 August 2013
Mark Carney, in his first report from the Monetary Policy Committee has told the world that interest rates will not rise until unemployment is down by 750,000. 7 per cent unemployment was the maximum at which he would consider raising interest rates. It was not a target but a trigger for reassessment. His estimate of the long-run equilibrium rate for unemployment was lower still.
Part of his message is that the slowly recovering economy still contains too much slack to allow him to increase the rate. Excess slack is damaging and wasteful but a degree of it provides the resources to allow growth when it comes. A small unemployed workforce permits a new business to begin without having to destroy a declining one first. A fall in the value of the pound after the financial crisis did less than expected to increase exports because UK manufacturing had very little slack to be brought immediately into production to meet the extra demand.
The wish to maintain a certain level of slack brings with it a cost. Some resources get wasted if the slack is not used. Paying continuous benefits for unemployed labour feels expensive to the taxpayer. One way of addressing spare labour is the zero hours contract, whereby when demand for labour drops, an employee agrees not to get paid. In terms of job-security, it falls between regular employment and casual labour. There is no need to reapply for each bit of work but the employee cannot be sure of the income, much as a wind farm will not guarantee electricity whenever it’s wanted but can at least stay connected.
Where an employer can attract staff, they are in a position to take on extra people, increasing capacity and reducing the risk of shortages, without having to pay any extra money. They can, if they wish, merely spread the work more thinly among the staff, who each have to make do with less. They pay for the employer to enjoy a level of slack.
If people can cope with the uncertainty, then working on a flexible basis does benefit their employers and the economy generally. Typically they, like the wind farm, will need some form of backup, like a second income, a working tax credit, top-up benefits or savings. They will be adept at using fallow time to their own advantage, making productive use of time for which their employer is not paying.
However, many people are not in that happy situation. CIPD estimate approximately 1,000,000 workers are on zero-hours contracts. Close to a quarter, that is over 200,000 people, want more hours. They consider themselves not unemployed but underemployed. 14 per cent of the survey, meaning around 140,000 of the workforce, responded that they frequently did not get paid enough for a basic standard of living. There does come a breaking point. Although precise numbers of contracts involved are hard to obtain, G4S, who make use of zero-hours contracts, were unable to secure enough people to provide Olympic security without offering the certainty of paid work.
However, any review of zero hours contracts will need to consider how much the employer should recompense the staff for offering the flexibility. Rather than banning the practice altogether, a more workable answer may be for employers to pay something for flexibility. Concepts such as retainers, on-call time, and overtime are well established. If an employer sets core hours for staff availability, they can offer a retainer rate for fallow staff during those hours, regular pay while they are working and higher overtime whenever they need people outside those hours. Forcing a million people to tear up their employment contracts may cause them more problems than it solves.