Labour market flexibility has saved the UK – so don’t bash it

Allister Heath

IT’S all in the name. What would you prefer, a zero hours contract, or a flexible arrangement with a company that means that you will be asked to work as and when you are needed, with hours variable?

An unscientific focus group confirms the obvious: the first option sounds nasty and pointless (suggesting no work at all), while the second is more attractive and for some preferable to pure freelancing. Yet both descriptions refer to exactly the same thing.

The ONS now believes that there are 1.4m such contracts in the UK (with some workers having more than one), far more than previously thought, partly because people are now much more aware of the kind of arrangement they have signed up to, thanks to the media attention. Crucially, the vast majority of people with a “zero hour” contract say that they work all the hours they need. In most cases, people are happy with the arrangements.

Yet the practice has predictably triggered a moral panic, with Labour threatening to legislate to reduce its prevalence and make it harder for folk to agree these kinds of contracts, even if they actually want them. Ukip also dislikes them.

Fortunately, the Labour proposals aren’t as restrictive as the rhetoric about “exploitation” suggests – but yet again we see that a chunk of the political elite doesn’t understand why the UK has created so many jobs against the odds in recent years, despite the terrible recession. The reason is simple: labour market flexibility. Wages fell hand in hand with productivity, people agreed to work variable hours and adapted to changing circumstances in a way that would have been unthinkable in the 1970s or even the 1990s.

The result is that despite much more cumbersome labour market regulation since liberalisation peaked during the John Major years – as a result of increasing powers to the EU and a more interventionist Downing Street under Labour and coalition governments – the cultural shift and innovation in the labour market saved the day.

What would happen were “zero-hour” contracts banned? Some people would be rehired as freelancers, but that would only work legally for those able or willing to work for more than one employer. These people would no longer be eligible for employers’ national insurance, reducing the tax take. Some people would be taken on as staff with regular part-time or full-time contracts, but this would be risky for firms: they prefer undetermined hour deals when they cannot predict demand, and hence the need for labour.

So if they had to tie their hands, their demand for staff would fall to the bare minimum, companies would seek to replace people by machines (such as automated supermarket check-outs) whenever possible and redundancies would increase, with people sacked far more frequently as and when business dried up or became too erratic. Corporate fixed costs would rise, and firms would become more likely to go bust (paying for redundancies can push a company with a tricky cash flow over the edge). Many workers who now regularly work full time but sometimes just a few hours a week would be given part-time contracts – on average, many would get fewer hours. There would be more certainty but they would be unhappier.

There are still huge problems with unemployment and under-employment in the UK, despite the astonishing, prediction-defying performance of the labour market since 2008. The total number of hours worked and the overall employment rate still need to rise, and youth unemployment in particular needs to fall much further. But the only way to achieve this is to build on flexibility.

The best protection for workers is choice: the more jobs there are (including variable hour positions), the more options they will have and the less likely it will be that they have to accept the first job that is offered to them. We need more flexibility, not less.
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