Why we shouldn’t clamp down on zero-hour contracts

The Office for National Statistics has revealed that 697,000 people (about 2.26% of employees) are on zero-hours contracts in their main job, up more than 100,000 on a year ago. Such contracts make life uncertain for the employees concerned, who may not know from week to week, or even from day to day, whether they have paying work. Some 33% of those on zero-hours contracts say they would like to work more.

So should we be clamping down on zero-hours contracts? No, we should not.

First, it is absolutely correct that zero-hours contracts have become far more common in the last two or three years. They hovered at about 0.5% for most of the period since 2000. They rose in use quite slowly between 2005 and 2012, then shot up to just under 2% in 2013 and to that 2.26% figure in 2014.

However, the unemployment rate has also come down in the last two or three years as well. In 2011 it stood at over 8%. Now it is less than 6%, and seemingly headed steadily down. Even though zero-hours contracts represent only a very small part of the labour force, it seems reasonable to argue that the two trends are related. The economic outlook is brighter, but is still uncertain; businesses remain unsure about the future, unsure about their markets, unsure of how much they should invest, unsure of how many workers they can justify taking on. A bust-up in the eurozone, for example, or a general election that delivers an unfavourable or unworkable government. might change the outlook completely for many UK businesses. So the only way that they can rationally expand their production, and be ready if things really do boom, it so cut their employment risk. Hence zero-hours contracts.

Remember too that even though the ONS talks about people’s ‘main’ job, they might not be the only income earners in a household. The same is true of those on the minimum wage: many of them will be secondary earners. In fact, 34% of those on zero-hours contracts are aged 16-24 and half of those are in full time education. To them, a minimum wage job or a zero-hours contract, while frustrating, is not a disaster, and the extra income, however low or intermittent, is welcome.

Critics – you know who – say that the government has allowed a ‘low-pay culture’ to go ‘unchecked’. So what would be their solution? Ban zero-hours contracts? Raise the minimum wage yet further? The inevitable result would be that employers would no longer be willing to take the risk of employing so many people. And first to go would be young people, with fewer skills and less understanding of workplace culture than more experienced employees, and secondary earners, often women. There would be fewer ‘starter’ jobs through which young and unskilled people could gain experience, more young people trapped in benefits, and a rise in unemployment more generally.

What will do in zero-hours contracts, of course, is continuing economic growth. As unemployment falls, businesses will find it harder to attract employees, and workers and potential workers can become more choosy about the jobs they take. Zero-hours contracts will once again become a very small part of the employment market. Growth, employment, greater security. Job done, and not a politician in sight.

Better to reverse QE than raise interest rates

That is, of course, a chart of the American, rather than UK, money supply. But much the same has happened to our own money supply under the same QE program. And it’s also telling us that it would be better to reverse QE than it would be to raise interest rates. So the idea that that debt could just be cancelled doesn’t fly we’re afraid.

We all know that at some point we’re going to have decent economic growth again, unemployment will fall to a minimum (that frictional unemployment that reflects people changing jobs, not involuntary unemployment) and that then inflation will start to rise again. We all also know, because Milton Friedman told us so, that inflation is always a monetary phenomenon. And, finally, we all also know that base money creation is more inflationary than credit creation: or boosting M1 leads to more inflation than the same boosting of M4 would cause.

It’s putting those all together that tells us that we should reverse QE. Think through the future: so, we get out of this liquidity trap, this zero lower bound. The velocity of money returns to something like normal. At which point we’ve got two choices as to how to reduce the accompanying inflation. One is to raise interest rates, the standard response. But that works on M4, it slows credit creation. We could also reduce that money supply by reducing M1: reversing QE. And as above, we think that shrinking M1 would have more effect on reducing inflation than reducing M4 would.

Another way of saying the same thing is that the amount we’d have to raise interest rates to choke off inflation will be higher if we don’t reverse QE than if we do. And this will be true for decades to come as we gradually get back to the right sort of relationship in size between M1 and M4. Or, not reversing QE means that we have to accept more economic pain to reduce inflation than if we reverse QE. For decades.

Which rather puts the kibosh on that idea so trendy over on hte left. Which is that as one part of the government owns the debt of the government we could just cancel that debt and reduce the debt burden. But doing that permanently increases that base money supply and thus permanently increases the interest rates we’ll need to slay inflation in the future.

So, reverse QE before raising interest rates.

Economic Nonsense: 14. Government can create jobs by spending

Government can certainly create the appearance of new jobs by spending.  The minister can be televised proudly cutting the tape to open a government-funded business employing 100 people.  The problem is that government has to take that money from the private sector in order to do so.  It can do so by taxation, inflation or borrowing, and the effect is to give the private sector less money to spend.  That, in turn, means lower demand for its goods and services, less economic activity and fewer transactions.  The net result is that jobs are lost in the private sector as a result.

Part of the political problem is that the government-funded jobs can be seen, with ministers taking credit.  The private job losses take place quietly, without people realizing that they are the result of government activity.

There has been much discussion in academic circles as to whether the publicly-funded jobs gained are more or fewer than the private sector jobs lost, but there is a respectable literature to suggest that they are fewer, and that 100 jobs created with public money will result in more than 100 jobs disappearing or not happening in the private sector.

Another part of the problem is that government-funded jobs are created in accord with political rather than economic priorities.  The projects sanctioned are those that find favour with ministers, rather than those created to meet demand.  They can be done to court electoral popularity rather than to satisfy economic needs.  Jobs funded by public money often need public money to sustain them afterwards, and risk disappearing if public subsidy is withdrawn at some stage in the future.  Governments are notoriously bad at “picking winners” to support with public funds; it is not their own money they are putting at risk, so they are less likely to do cautious and full accounting.  Private investors tend to be more hard-headed since they stand to incur any losses that come about.

Logical Fallacies: 13. Petito principii

 

Madsen’s latest video on logical fallacies examines the ‘petito principii’.

You can pre-order the new edition of Dr. Madsen Pirie’s How to Win Every Argument here

This is vile, a stain upon our society

There are those who think that we here at the ASI are simply concerned with economics, or the economy. This is not so: we are really about liberty and freedom, it’s just that we apply those concepts to matters economic as well as to sexual, legal and all the other realms of life. At which point we draw attention to this, something that is entirely vile, a stain upon our society:

But what sort of rule of law allows an innocent person to be locked up for many years and then denied any compensation for their wrongful imprisonment?

Outside the summit jamboree, for which a ticket would cost you £1,750, were some people who could have given the delegates a slightly less rosy picture of Britain’s supposed superiority. They included those who had been wrongly convicted but who have been denied any redress under the ruling introduced last year, which virtually says that it is not enough to be innocent – in most cases you have to find the real culprit of the crime for which you were convicted before you can be compensated.

Among those challenging the new regulation is Victor Nealon, a former postman, who was convicted of attempted rape in 1996. He served 17 years, 10 years longer than his recommended tariff, because he continued to protest his innocence. In 2013, after fresh DNA evidence taken from the clothes of the victim pointed to “an unknown male” as responsible for the crime, Nealon was freed with just £46 in his pocket to try to rebuild his life. The Ministry of Justice now declines to compensate him because, under the new rules, his innocence has to be proved “beyond reasonable doubt”.

Another man who feels equally bemused by this is Barry George, whose conviction for the murder of Jill Dando in 1999 was quashed in 2007. The police file on who was the real murderer in this case remains open, but George has never received compensation for his time behind bars.

These rules started to change back in 2006. About which was said this:

CHARLES CLARKE’S announcement that he is limiting the compensation available to those wrongfully imprisoned has been met with the hoots of derision it deserves. What is more important to work out is why the Home Secretary made such a lunatic decision in the first place.
The proffered reason, to save £5 million a year, is simply beyond satire. The Government, in its infinite wisdom, annually disposes of about £500 billion of the nation’s production: denying those innocents unjustly banged up will save some 0.001 per cent of public expenditure. Just to provide some context, the £5 million saving is less than the £5.7 million spent in 2003 on subsidising the swill bins at the Houses of Parliament. No, it can’t be about the money.
The mark of a liberal society is that more care and attention is paid to those innocents wrongly found guilty, than to the guilty who escape justice. Any criminal justice system designed and run by fallible human beings will make mistakes. The important thing is how we react when a miscarriage of justice occurs. Shamefully, under the Home Secretary’s proposals those who find their guilty verdict overturned at their first appeal will have no right to compensation. For others compensation will be capped at £500,000.
But let’s remember this. It takes from 20 months to two years to get a first appeal against a conviction heard: long enough for those convicted to lose careers and jobs, marriages and houses. Yes, there always will be those who unjustly enjoy Her Majesty’s hospitality, and whatever compensation we offer in a monetary form will not be enough to fill the gap of years of liberty denied, lives wasted, opportunities lost and families sundered.
But do we really expect those afflicted by the mistakes of the state apparatus simply to shrug and smile it off as just one of life’s unfortunate things? Can the Home Secretary not see that it is our solemn duty to those wrongfully convicted that we both apologise and make amends as best we can?

Whatever the motivations for this decision they do not change the fact that it is a disgrace. Just as mother always said: you make a mistake, you apologise, make what amends you can and promise not to do it again. When the State makes a mistake and steals someone’s liberty it is indeed our duty, to compensate those wronged. Whether the Home Secretary is ignorant of this moral fact, or simply wishes to ignore it for other reasons, it is appalling. Shame on you, Mr Clarke, shame on you.

We have not changed our view. This is a vileness that must be eradicated from Britain.