In recent days, the issue of zero hours contracts – under which employees do not know from week to week how many hours they can expect to work – has recently moved to the top of the political agenda. They have been praised by some as offering a desirable flexibility to the labour market, and as offering a way around “stifling” employment protection legislation (even though the UK has some of the weakest employment protection legislation in the world). Others have attacked the uncertainty and potential for exploitation they bring – a view I firmly share. The New Economics Foundation gives a good summary of some of the issues here, making the crucial point that in an economy with falling real wages and shrinking demand, the uncertainties around zero hours contracts are likely to inhibit consumption further – as well as pointing to the difficulties of claiming tax credits or saving for a pension. The human consequences of zero hours contracts remain beyond justification.
A more rigorous examination of the underlying economics comes from a piece on the Pieria website by Frances Coppola, looking more generally at the effects of structural changes in the labour market to make it more flexible at a time of recession. Coppola’s arguments – drawing on recent writing by Paul Krugman – may be summarised as follows:
– In classic economic theory, as demand contracts, prices fall, allowing the economy to expand once again
– But Krugman suggests that if you ask the question, “why should falling prices revive the economy” you come up against the interest rates question – falling prices increase the size of real debt, and if interest rates cannot fall to reflect this you have a fundamental problem; so falling prices can just as easily lead to further contraction of demand in a situation where real interest rates are close to zero (which is what we have at the moment)
– returning to the real world, in many advanced countries central banks have been using quantitive easing to reduce real interest rates – although in the Eurozone that has not been the case, because on the hard-hit periphery a number of factors have conspired to keep real interest rates high; debt repayments, dysfunctional banking systems, and other factors. This means that to adapt Krugman’s model, interest rates remain too high and so aggregate demand falls.
– if you add to that the pressures caused by structural reforms to labour markets being forced on the Eurozone periphery, the situation worsens. While in theory more flexible labour markets should allow recovery to occur as prices fall, in practice, because interest rates cannot fall, this does not happen, and measures which encourage wages to fall actually depress aggregate demand further. Structural rigidities, however distasteful to market purists, actually put a floor under wage falls, which means that the rush into depression is halted.
– moreover, talk about “export-led growth” is unsustainable in a world where every economy is looking to maximise exports and reduce imports. Migration remains one way of balancing labour markets, but emigration reduces aggregate demand.
– in conclusion, there is a powerful theoretical underpinning for the view that increasing labour market flexibility at times of recession actually makes things worse, not better
In other words, politicians who argue that we need more flexible working in the form of lower and less certain wages to compete – and zero hours contracts certainly fall into that category – are talking theoretical garbage; and in many ways it is intuitively obvious that falling wages, and the falling aggregate demand going along with that, greatly inhibit the prospects of recovery.
But I’d argue that there is positive and negative flexibility; and that while my own view is that the key to ending recession lies in increasing demand through higher public spending financed by borrowing at a time of unprecedentedly low interest rates, there are positive things that can be done on the supply side. Chris Dillow coined the phrase “supply-side socialism” and almost every speech Gordon Brown made was dripping with aspects of it – training, education, better skills, positive support by the state and employers to provide high-value employment, rather than just cutting costs. While it is not the whole story, it’s an important part of the equation.
Tories, notoriously, do not get macroeconomics (or, increasingly, economics of any sort really – has anyone ever heard David Cameron utter an intelligent or insightful comment about economics?). In their backing for zero hours contracts, or their dismissal of the issues (the Chair of the Brighton and Hove Conservatives loftily dismissed zero hours as a “holiday issue” on Twitter earlier today), they’re missing the point, and illustrating how far they remain from intelligent dialogue about how to deal with current economic woes.