What do Zero Hours Contracts tell us about the UK labour market?

The UK labour market situation post the credit crunch shock can according to the official figures be looked at as a game of two halves. What I mean by that is that the quantity measures such as employment and unemployment have performed well but the price measure or wages has disappointed. As I pointed out in my analysis of the 30th of August this situation is one which poses serious challenges to conventional economic theory. This is not just true of the UK as Japan has very little wage growth in spite of reaching what was considered to be the full or natural rate of unemployment.

There are two main routes where we can make progress in understanding this position. One is to note the data which is excluded from the official numbers such as wages/pay for the self-employed and the other is to dig deeper into an area mostly ignored by the UK monthly updates which is the concept of underemployment. This is a situation where people have work but would like to be able to work more. The United States makes a better fist of this than we do which is why I regularly quote their measure of un (der)employment called U-6 which includes this.

Persons employed part time for economic reasons (U-6 measure) are those working less than 35 hours per week who want to work full time, are available to do so, and gave an economic reason (their hours had been cut back or they were unable to find a full-time job) for working part time. These individuals are sometimes referred to as involuntary part-time workers.

In the UK one way we have begun to get a little more insight into the situation has been the way that we have gathered more data on those on what are called Zero Hours Contracts or ZHCs.

Sports Direct

This company has been hitting the headlines in recent times and in many respects it should not have been a surprise because we knew that the retail industry was one where ZHCs were used extensively. However maybe not this extensively. From Reuters in July

Britain’s biggest sporting goods retailer Sports Direct employs around 75 percent of its 19,000 UK workers on much criticised zero-hour contracts, its chairman said on Wednesday.

The situation in the main warehouse was exposed to be one which undercut even the use of the phrase Victorian workhouse as conditions were dreadful and the minimum wage was undercut. This was in marked contrast to other employees of the company.

Sports Direct, whose 4,300 permanent UK staff qualify for lucrative bonus share scheme payouts,

There have been changes over the past couple of days but not apparently to the main warehouse. So our eyes were opened to a company that was clearly operating what we feared which was a two class employment situation of in effect have and have-nots. Maybe some of the shop workers were students who were suited by ZHCs but it is hard to believe that the workforce at the main warehouse did on such a scale. As the workforce there was mainly composed of immigrants we also saw an example of them associated with low wages.

Today’s update on the national situation

The Labour Force Survey or LFS gives us an idea of the scale.

According to the LFS, the number of people employed on “zero-hours contracts” in their main job during April to June 2016 was 903,000, representing 2.9% of all people in employment.

And also the rate of change.

This latest estimate is 156,000 higher than that for April to June 2015 (747,000 or 2.4% of people in employment).

I guess you are not going to be surprised by who they are.

People on “zero-hours contracts” are more likely to be young, part-time, women, or in full-time education when compared with other people in employment.

We do get some direct insight also into the underemployment situation.

On average, someone on a “zero-hours contract” usually works 25 hours a week. Around 1 in 3 people (31%) on a “zero-hours contract” want more hours, with most wanting them in their current job, as opposed to a different job which offers more hours. In comparison, 10% of other people in employment wanted more hours.

Now we hit a problem which is that the LFS is a survey and thus relies on people reporting that they are on a ZHC. I have pointed out before that this is true of other areas such as full-time work where there is not the set definition you might think. But in this area where if the Sports Direct situation is any sort of guide at all we could see that an immigrant workforce may not report the situation.

Another way of looking at the state of play is to use what businesses report to the ONS.

The results from the November 2015 survey of businesses indicated that there were 1.7 million contracts that did not guarantee a minimum number of hours, where work had actually been carried out under those contracts. This represented 6% of all employment contracts.

As you can see there is quite a gap between the two different ways of counting as we are reminded that certainty and precision in the labour market is somewhere between a mirage and a chimera.

Can we define it?

It is not easy but the official UK version goes as follows.

To provide clarity and prevent confusion with the other estimates of “zero-hours contracts”, the remainder of this article refers to estimates from our business survey as no guaranteed hours contracts.

The Resolution Foundation

This has tried to offer more insight by breaking down the numbers after excluding those who are likely to be keenest on the flexibility of ZHCs such as students.

For workers aged over 25, more than two in three workers on ZHCs (400,000) have been with their current employer for more than a year.

They also argue this.

The Foundation notes that for many of these workers, fixed-hour employer contracts, which offer a guarantee of paid work and paid holiday and sick leave, would be more appropriate.

This really opens a can of worms as what if the jobs would not exist on such terms? But we also have the example of Sports Direct where an unscrupulous employer has exploited the situation to drive higher profits and bonuses for the few. I wonder how long someone in the Sports Direct warehouse would have to work to get the wad of £50 notes that Mike Ashley pulled out of his pocket yesterday?

Comment

The credit crunch era has made us look more closely at the data we are given on the labour market and the truth is that what were previously regarded as cracks are in fact fissures. The wages numbers exclude the self-employed and those at small businesses for example. But we have to face the fact that the idea of a single labour market is a fantasy and we have in fact a multitude of them. For some such as those in receipt of Sports Direct bonuses it is a really nice place to be. But if we exclude them what is the state of play of the majority?

Also if we now move specifically to ZHCs they are part of a trend which I think that the Resolution Foundation is right to specifiy.

The Foundation adds that while ZHCs still make up a small share of the labour market – less than a million workers are on one – they form part of a wider growth of atypical employment, including self-employment and agency work, which often lack the rights and security that employees receive.

So a decent slug of the labour force is in a quite different situation as we think of businesses like Uber and indeed the “gig” economy. This will not be bad for everyone as some it will suit but many it will not. It would be revealing I think to see how wages have performed for these people. Also it is hard to see anyone being keen on this.

In April to June 2016, 15% of people on “zero-hours contracts” worked no hours in the week before their LFS interview compared with 9% of other workers

Yet we are supposed to have so much employment legislation aren’t we?

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15 thoughts on “What do Zero Hours Contracts tell us about the UK labour market?

  1. How do these earning and hours worked figures cope with highly paid contractors who then pay themselves minimum wage and take the rest through company dividends having first written off any purchases of electronic equipment off against tax and claimed the VAT back? This trick is fairly common for IT workers in the city of London. There is also the trick of paying your spouse and any children over 16 in your family as well since you can “employ” them and take advantage of their tax free earnings limit. I knew someone who managed to claim maternity pay from the government whilst doing this.

    Do the wage surveys pick up dividend payments or just wage packets?

    • Why do you assume it is a trick for a company to offset its costs against income?
      Companies are taxed on profits not on sales.
      Even for a private service company there may well be costs such as the purchase of equipment, the cost of obtaining work, the net cost of VAT on sales/ purchases, the cost of travelling to your customer’s place of work, the cost of a home office (perhaps staffed by your wife, etc.
      There is also the “cost” of no income between jobs, or holidays, no sick leave,no company pension on top of your salary etc.

      There are also HMRC rules on whether an individual is allowed to claim he is a consultant or is deemed to be employed.

      I doubt that wage surveys would pick up dividend payments as by definition they are not wages

      • Hi Nick,

        I’m not assuming it is a trick for a company to do this. It has proper costs and it needs to provide equipment. In fact this is the reason the rule is there.

        What I have seen a lot of is contractors buying devices such a video projectors that they do not need for their actual work and additional laptops and claiming it as a company expense. None of this is illegal but it stretches the rules. It’s extremely hard to determine if something has been purchased for personal use or company use and if you own the company then you are the decision maker for this.

        I am aware of the trade-offs made with lack of sick pay, maternity/paternity pay etc.

        Paying yourself minimum wage and then earning huge amount of dividends as you end up paying far less tax is perfectly legal and I won’t pass any moral judgement on it but it is another reason why you cannot trust earnings figures as they don’t necessarily represent the actual income a person has. In the case of a contractor whose company is receiving 700 pound a day for their services it seems odd that their only employee earns minimum wage.

        • Paying yourself dividends does not result in paying less tax. It’s all income, it is added up on your tax return and you pay tax on it all – the ratio of salary to dividends makes no difference.

          If you buy stuff that is not wholly and solely for the use of the company then the cost is not an allowable deduction. You are breaking the law. It is illegal. Don’t have trouble with morals on that one.

  2. One of the reasons I found this site was because I was engaged in a search to look beneath the govt stats and gain a realistic appreciation of the state of things.

    As ever Shaun,you look behind the quoted stat and look at the weaknesses of the way it is measured.I loved this quote
    ‘But in this area where if the Sports Direct situation is any sort of guide at all we could see that an immigrant workforce may not report the situation.’

    Exactly,and possibly one reason why so many working class people voted out at the EU ref and so many big businesses voted in.

    I’ve felt for a very long time that we need a U6 equivalent here.Given the prevalence of tax credits-which encourage part time work,ZHC’s and a burgeoning migrant workforce that is open to all sorts of abuses through not being aware of it’s rights,it’s incredibly hard to get a genuine reflection of the employment situation.

    What we do know for sure,is that there are many more people on min wage than 15 years ago,many more on ZHC’s and yet reportedly,wages are significantly higher than fifteen years ago.

    Even if they could ascertain the median average wage,I’m not sure it would be that reflective given the above.

    • Obviously this is only anecdotal evidence, but I was recently talking to a man employed as an “agency worker”. He was “employed” by a recruitment agency to work on a biscuit packing line for a famous company. It was a minimum wage job, with no guarantee of any work at all, but usually ended up being four days of eight hour shifts (6am to 2pm). Most of the workers were students, or Romanian.
      He was vehement in his criticism of “the Poles” (who have become a large population in his town) for accepting low pay, and keeping wages down. He voted Brexit because of this, believing that would stop East European immigration ( I think he is due to be disappointed….).
      Strangely, the biscuit company have now offered full time permanent employment to many of the “permanent temporary” agency workers. I don’t know the reason for this but may be because the packing line is now not as temporary as originally intended. Obviously the students have not accepted, and, oddly, neither have many of the Romanians, who have gone back to Romania. Again, I don’t know the reason behind this; possibly they regarded the job as just a temporary summer job to earn more than they would in Romania.

      • “He was vehement in his criticism of “the Poles” (who have become a large population in his town) for accepting low pay, and keeping wages down. He voted Brexit because of this, believing that would stop East European immigration”

        This why most voted Brexit – it’s called racism.

        • He was not criticising “Poles” as people, but for their economic impact on his financial position. I don’t think that is racism, but “financial reaction”. Their colour, culture, etc quite simply didn’t seem to matter.
          To confuse the picture, he was originally from the West Indies many years ago. The irony of his statement was apparently unrecognised…..

  3. Hi Shaun
    Today’s blog to me questions whether
    “conventional economic theory” holds much water
    in the real world for the low paid, and I take it that
    Mike Ashley is not on your christmas card list!
    My granddaughter who to her credit has
    worked on ZHC basis to part fund her 3rd year at uni
    started with low hours but once she covered for others
    her hours escalated to 35. How many people on ZHC
    have true work ethics? I wish it were not the case but
    lower living standards will be the norm for the masses,
    until they squeak.

    Pink Floyd Us and them

    Down and out
    It can’t be helped but there’s a lot of it about.
    With, without
    And who’ll deny it’s what the fighting’s all about?

    JRH

      • To buzzin, I couldn’t reply to your reply to me so am using the reply to your comment to JRH.

        You cannot defend living standards by banning immigration. The result of such policy will be:

        1. You lose access to skilled immigrants and this costs the country in lack of technological progress, eventually (20 years) leading to the country struggling to export as other countries with progressive policies like allowing immigration, investing in education and innovation have moved ahead with higher wages to skilled workers whom are more productive due to technological advancement. The response to this will be to suppress wages thereby driving down living standards as prices will remain constant or increase caused by a weakening currency as the country deteriorates and investors lose confidence in it – sound familiar?

        2. You lose access to unskilled immigrants whom work for low pay (but hopefully NOT less than the National Living Wage). This constrains your labour pool leaving you with nationals or long term immigrants who have settled in the country adopting the country’s standards whom are not prepared to work for low pay. This drives up wages of low paid jobs in sectors like agriculture and retail which leads to higher inflation which leads to the lower paid being no better off materially although they are being paid more money. It may also make higher paid individuals slightly worse off.

        If you want a better standard of living for the whole populace, you have to invest in infrastructure like transport and education. These are long term structural commitments, the fruits of which would only begin to be seen in 4 – 5 years for transport and in 20 years in the case of education

        mickc’s clarification disproves my racism allegation, in this specific case…..

  4. Hi Shaun
    US ‘U6’, Germany ‘mini contracts’, UK ‘ ZH/self-employed’ are probably the tip of an iceberg.
    If you include all of these you get to about 15% of the ’employed’ numbers. As the US numbers demonstrate that still leaves something like 25% unnaccounted for , as the ’employed’ numbers are about 60% of the total ‘workforce’ potential.
    My anecdotal evidence of three post-grad educated kids, only one appears in any UK employment statistic. GIGO without doubt.

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