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Banning zero-hours contracts could stifle flexibility

03 Feb 2017

Greater uncertainty requires greater work flexibility, says Alex Edmans  

 

 

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In September 2016, Sports Direct announced it would offer 18,250 of its workers on zero-hours contracts the option to switch to a guaranteed 12-hour week. The UK’s biggest sports retailer made the move after some of its workers publicly claimed mistreatment, including being asked to work without pay and, if they refused, being denied hours the following day. 

Last year New Zealand’s government abolished zero-hours contracts. The new bill, which took effect on 1 April 2016, means employees are guaranteed an agreed number of hours and can refuse extra work without being penalised. 

While Sports Direct is a case in point for highlighting the negative side of the controversial practice, there is a brighter side according to Alex Edmans, Professor of Finance at London Business School. He advocates diversity: “We need the balance of both zero-hours and 35-hour contracts.

“I understand that someone looking to make a big financial decision like paying a mortgage or sending their children to university wants fixity and security, but many people want flexibility. Zero-hours contracts offer that.” 

According to the Office for National Statistics, the number of UK workers on zero-hours contracts reached 903,000 – 2.9% of the country’s workforce – in 2016, up from 747,000 in 2015. The latest figures from the thinktank the Institute for Public Policy Research show that the growth of self-employment in the UK has been rapid. The number of self-employed has grown by more than 1.5 million in 13 years to 4.5 million, accounting for two-thirds of new jobs since 2008. The figures suggest an increasing demand for people to be their own boss – to work how and when they want. 

“Zero-hours contracts are beneficial when the workers actually choose them,” says Professor Edmans. “Every time I get into an Uber I ask the driver, ‘Why do you choose to do this?’ And generally, they tell me that they like to work on their own terms.” 

Uber has been lambasted by the media for adding to the so-called “gig economy”, allowing people to have smaller jobs instead of, or as well as, full-time jobs. Instead of a salary, workers are paid for the gigs they do, such as a taxi journey. “Some Uber drivers want extra cash. Zero-hours contracts allow them to work more than 35 hours if they like. Yes, it means that sometimes they get less and sometimes they get more, but it also means that they can choose how and when they work. This leads to more independence.”

Tapping demand 

Professor Edmans demonstrates what would happen if labour supply was fixed. On 21 March 2015, fans of popstar Ariana Grande gathered at her concert in New York’s Madison Square Garden. Many used Uber to travel home. He says: “There were hordes of people trying to get home and many of them used Uber. There was a price surge, but everyone using the service was able to get home.” Surge pricing works when demand increases. When people started using their app, the price surge increased Uber’s base fare 1.8 times, making it more profitable for drivers to work. Subsequently, more drivers came on the road and supply increased to match demand. 

“Flexibility works here. People wanted to get home, the price went up and more drivers were brought in. This can only happen under a zero-hours contract – it’s flexible for the consumer and for the worker.

“It’s true that some workers may prefer a standard contract of 35 hours – for example, taxi drivers working for executive car firm Addison Lee. But what the media often doesn't portray is that a firm such as Uber might not hire someone unless it has the flexibility to give a zero-hours contract: in other words, we need both.”

Many businesses use predictive analytics systems to forecast demand and fine-tune their product stock levels: can the same process exist for talent and labour? “Sometimes it’s just impossible for companies to know what labour they’ll need when. Imagine you’re a company uncertain about when demand will be higher or lower, you’ll want the flexibility to give higher or lower contracts. I understand that for some people a 35-hour contract would be better, but that’s not the real choice. It’s a choice between a zero-hours contract and zero contract.”

Outsourcing demand 

If workers are unwilling to flex their hours to suit demand, organisations may outsource the work to automated machines, argues Professor Edmans. “My fear is what happens when policymakers make it harder for businesses to hire labour.” It may become easier for organisations to rent machines instead because they can be switched on and off. 

He says: “The world is changing. Supply is changing. And if there is indeed a lack of 35-hour contracts, which are being removed because of the inevitable growth and development of the economy, it means that people have to adapt with the times. People need to be flexible in terms of the time they work and in the tasks they do.”

Consider the arrival of ATMs (Automated Teller Machines), which threatened to take bank tellers’ jobs. “People thought that ATMs would make tellers unemployed, but in fact the opposite was true,” explains Professor Edmans. In this TED talk, MIT professor David Autor retells how in the 1970s before banking ATMs were introduced, there were 250,000 bank tellers in the US. Today there are 500,000. 

What triggered this labour paradox? The ATM enabled cost savings in branches, freeing up tellers’ time to do more meaningful work. Their responsibilities shifted from low-value tasks, such as counting cash, to relationship-building and sales. “Banks saw the benefit and hired more bank tellers. Tellers started giving customer advice, advising on ISAs and selling insurance – now they’re employed but their job has morphed into something else.”

Will there be a rise in the number of zero-hours contracts in a world where people want more flexible work and organisations want more flexible workers? Professor Edmans thinks so: “The world is more uncertain about what demand there may be. With greater uncertainty, we need greater flexibility. As a society, we should promote diversity of organisations, where some businesses offer regularity and others offer flexibility.”

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