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Zero-hours contracts harm British economy's long term health

Professor Kim Hoque, Professor of Human Resource Management, Warwick Business School

Published October 2013

Do zero-hours contracts offer both employees and employers flexibility or do they, as in the words of one trade union leader, “hark back to the times when people would stand at the factory gates waiting to be picked for a day’s work”? Professor Kim Hoque comments on recent revelations that a million people in the UK are on zero hours contracts.

McDonalds sign

A recent survey by the Chartered Institute of Personnel and Development (CIPD) found there were one million people in the UK on zero-hours contracts. Fast food employees, social workers, further education lecturers, nurses and radiographers are just some of the people who might find themselves on them. The contracts do not guarantee those employed shifts or regular work patterns but they do expect the employees to be available when the company or organisation needs them.

Despite being used by more than one in four companies, zero-hours contracts are actually a drag on the UK economy, which has managed to keep employment remarkably buoyant despite the economic slump since the financial crisis.

“People on insecure zero-hours contracts are less likely to have the confidence to spend than people with more stable incomes,” explains Kim. “Zero-hours contracts could represent a drag on consumer spending and hence economic recovery.”

The contracts may offer some advantages but these, if founded, do not outweigh the drawbacks they bring to the economy and those in the labour market. Official figures analysed by the Resolution Foundation showed that zero-hours workers earned an average of £9 an hour, compared with £15 for other employees.

“From the employer’s point of view zero-hours contracts provide ultimate labour flexibility, enabling them to keep labour costs down by matching staffing to demand as closely as possible,” says Kim. “While this clearly has significant cost saving potential in the short-term, it is difficult to see how businesses can build motivated workforces that are committed to the goals of the business when they are employing staff in such a manner.

“The flexibility [the contracts] provide may well have enabled the UK to avoid higher levels of unemployment during the economic downturn. They may also have enabled some people to maintain an attachment to the labour market who would otherwise not have been able to do so. That said, such contracts could also be seen as part of the wider underemployment problem that has affected the UK economy in recent times, with large numbers of workers on part-time or casual contracts wanting to work more hours but being unable to do so.

“Hence, while unemployment has remained lower than many economists predicted would be the case, underemployment has been high and zero-hours contracts may be a significant part of this picture, and so impacting on consumer confidence and spending.”

Political reactions to the contracts have varied. Labour leader Ed Miliband pledged to crackdown on zero-hour contracts whereas Jo Swinson, Parliamentary Under Secretary of State for Women and Equalities and Parliamentary Under Secretary of State for Employment Relations and Consumer Affairs, acknowledged abuse was a problem but outlined some of the benefits the contracts brought, especially for students and people nearing retirement. Comments from Conservative MPs have been less forthcoming.

Union leaders have called for zero-hours contracts to be outlawed entirely, with Dave Prentis, general secretary of Unison, arguing that such contracts hark back to the times when people would stand at the factory gates waiting to be picked for a day’s work.

“He has also highlighted that many people on zero-hours contracts are on the lowest wages in the economy,” adds Kim. “Making them the least able to cope with financial shocks such as a cut in hours from one week to the next. Zero-hours contracts also make financial planning all but impossible. It is difficult to get a loan, a mortgage, a credit card or a tenancy agreement if you are not able to provide proof of earnings.

“There is a need for a more detailed review of the extent and impact of such contracts. What is notable is that the CIPD’s figures showed that zero-hours contracts are becoming even more widespread in the public sector than the private sector. While 17 per cent of private sector organisations in the CIPD’s research stated that they used such contracts, the figures were 34 per cent for organisations in the voluntary sector and 24 per cent in the public sector. This is more than likely a reflection of the increasing pressure local authorities are under to respond to budget cuts, requiring even tighter tenders for outsourced contracts, for example.”

The growth of such contracts is perhaps testimony to the extent to which employers have focused more in recent times on squeezing the wage bill rather than responding to attempts to encourage them to seek greater employee engagement.

“Given how far the benefits of such contracts are weighted towards employers, this is testimony to where the balance of power in the employment relationship lies,” says Kim. “Employees have no means by which to resist such contracts - given the weakness of unions in the private sector in particular – and the only option for many to such contracts is the prospect of unemployment."

Professor Kim HoqueKim Hoque is Professor of Human Resource Management at Warwick Business School. He joined WBS in August 2012. Prior to this he held professorial positions at Nottingham University Business School and at Birkbeck, University of London. Kim is an Associate Editor of Human Relations, and is also on the editorial boards of Industrial Relations Journal, Equal Opportunities International, Journal of Vocational Education and Training and Scandinavian Journal of Management. He has undertaken consultancy projects for the Chartered Institute of Personnel and Development, Shell UK, NHS Scotland and the UK Commission for Employment and Skills. He is currently a project adviser to the Japan Institute of Labour Policy and Training. He has also in the recent past been commissioned by the Trades Union Congress to conduct evaluations of the union learning representative and equality representative initiatives. He is a member of the Investors in People Advisory Board, which is responsible for overseeing the management and development of the Investors in People standard.

Lead Image: McDonalds hunt by Dave Morris (via Flickr).