Tag: marginal productivity

In a post last August we looked at the rising number of workers employed on ‘zero-hours’ contracts. These are contracts where there are no guaranteed minimum hours. Such contracts give employers the flexibility to employ workers as much or as little as suits the business. Sometimes it benefits workers, who might be given the flexibility to request the hours that suit them, but usually workers simply have to take the hours on offer.

Latest figures published by the Office for National Statistics show that zero-hours contracts are on the increase. In 2014 quarter 4, 697,000 workers were recorded as being on zero-hours contracts. This represents 2.3% of people in employment. Ten years ago (2004, Q4) the figures were 108,000 or 0.4%: see chart. (Click here for a PowerPoint of the chart.)

Around one third of the 697,000 people on zero-hours contracts wanted more work if they could get it and most wanted it in their current job rather than having to move jobs. These people wanting more work can be classed as underemployed. They also include those not on a zero-hours contract who would like to work more if they could.

According to the ONS:

‘People on zero-hours contracts are more likely to be women, in full-time education or in young or older age groups when compared with other people in employment. On average, someone on a zero-hours contract usually works 25 hours a week.’ (See section 4 of the report for more details.)

As we saw in the earlier post, many public- and private-sector employers use such contracts, including many small and medium-sized enterprises and many well-known large companies, such as Sports Direct, Amazon, JD Wetherspoon and Cineworld. It gives them the flexibility to adjust the hours they employ people. It allows them to keep people in employment when demand is low. It also makes them more willing to take on staff when demand rises, as it removes the fear of being over-staffed if demand then falls back.

As we also saw, zero-hours contracts are not the only form of flexible working. Other examples include: ‘self-employed’ workers, contracted separately for each job they do for a company; people paid largely or wholly on commission; on-call working; part-time working, where the hours are specified in advance, but where these are periodically re-negotiated; overtime; people producing a product or service for a company (perhaps at home), where the company varies the amount paid per unit according to market conditions.

The extent of zero-hours contracts varies dramatically from one sector of the economy to another. Only 0.6% of workers in the Information, Finance and Professional sectors were on zero-hours contracts in 2014 Q4, whereas 10% in the Accommodation and Food sectors were.

The flexibility that such contracts give employers may make them more willing to keep on workers when demand is low – they can reduce workers’ hours rather than laying them off. It also may make them more willing to take on workers (or increase their hours) when demand is expanding, not having to worry about being over staffed later on.

However, many workers on such contracts find it hard to budget when their hours are not guaranteed and can vary significantly from week to week.

Articles

lmost 700,000 people in UK have zero-hours contract as main job The Guardian, Phillip Inman (25/2/15)
UK firms use 1.8m zero-hours contracts, says ONS BBC News (25/1/15)
Zero-hours contracts jump in UK Financial Times, Emily Cadman (25/2/15)
Zero-hours contracts ‘disturbingly’ hit 1.8 million in 2014 International Business Times, Ian Silvera (25/2/15)
Zero-hours contracts a reality for almost 700,000 UK workers, ONS figures show Independent, Antonia Molloy (25/1/15)

Data

Contracts with No Guaranteed Hours, Zero Hour Contracts, 2014 ONS Release (25/1/15)
Supplementary LFS data on zero hours contracts – October to December 2014 ONS dataset (25/2/15)
Analysis of Employee Contracts that do not Guarantee a Minimum Number of Hours ONS Report (25/1/15)

Questions

  1. Distinguish between open unemployment, disguised unemployment and underemployment?
  2. Distinguish between functional, numerical and financial flexibility? Which type or types of flexibility do zero-hours contracts give the firm?
  3. In a ‘flexible’ labour market, what forms can that flexibility take?
  4. Why does the Accommodation and Food sector have a relatively high proportion of people employed on zero-hours contracts?
  5. What are the benefits and costs to employers of using zero-hours contracts?
  6. If a company introduces a system of zero-hours contracts, is this in accordance with the marginal productivity theory of profit maximisation from employment?
  7. What are the benefits and costs to employees of working on zero-hours contracts?
  8. Why has the use of zero-hours contracts risen so rapidly?
  9. Using the ONS data, find out how the use of zero-hours contracts varies by occupation and explain why.
  10. Identify what forms of flexible contracts are used for staff in your university or educational establishment. Do they benefit (a) staff; (b) students?
  11. Consider the arguments for and against (a) banning and (b) regulating zero-hours contracts.

Despite the prolonged stagnation in the UK, unemployment has not soared. In fact, over the past two years the ILO unemployment rate (see here for a definition) has fallen slightly – from 8.6% in October 2011 to around 8.0% today. What is more, the claimant count rate is considerably lower than the ILO rate – at around 4.4%.

Part of the reason for the relatively good unemployment figures is the rise in ‘zero-hours contracts’. These allow employers to cut the hours that people work without laying them off. The Office for National Statistics estimates that last year (2012) 250,000 people, or 0.84% of the workforce, were on such contracts.

But just what is meant by ‘zero-hours contracts’? According to the ONS:

People on zero-hours contracts are classified as being in employment regardless of the number of hours they actually worked during the survey reference week. This includes anyone who was not required to work any hours during the reference week whilst remaining on their current contract of employment. The continued existence of the contract of employment is the key determinant of their employment status in these situations.

If people are working less than they would like to, this is classified as underemployment, but such people do not appear in the unemployment statistics. Such contracts thus mask the true extent of surplus labour in the economy.

The Chartered Institute of Personnel and Development (CIPD) puts the figure much higher than the ONS. In the Summer 2013 issue of its Labour Market Outlook, it estimates that one million workers are on zero-hours contracts.

Many employers use such contracts, including many voluntary-sector and public-sector organisations, including the NHS, local councils and Buckingham Palace. They are also used by many small and medium-sized enterprises and many well-known large companies, such as Sports Direct, Amazon, JD Wetherspoon and Cineworld. It gives them the flexibility to adjust the hours they employ people. It allows them to keep people in employment when demand is low. It also makes them more willing to take on staff when demand rises, as it removes the fear of being over-staffed if demand then falls back.

But many workers dislike such contracts, which give them fewer employment rights and fewer hours than they would like to work. It also makes it difficult to budget when future income is uncertain. It also make credit and mortgages harder to obtain, as people have no guaranteed income. Another complaint is that companies may use the threat of lower hours as a tool to bully staff and get away with poorer working conditions.

In May of this year, the Business Secretary, Vince Cable, announced that he was setting up a review of zero hours contracts.

Note that zero hours are not the only form of flexible working. Other examples include: ‘self-employed’ workers, contracted separately for each job they do for a company; people paid largely or wholly on commission; on-call working; part-time working, where the hours are specified in advance, but where these are periodically re-negotiated; overtime; people producing a product or service for a company (perhaps at home), where the company varies the amount paid per unit according to market conditions.

The following videos and articles look at the issue in some detail: at the extent of the practice and at its benefits to employers and its costs (and some benefits) to workers. Both The Guardian and the BBC have an extensive range of articles on the topic.

Webcasts

Do zero hours contracts create real jobs? BBC Newsnight, Allegra Stratton (14/8/12)
Record number of ‘Zero Hours Contracts’ ITV News on YouTube, Laura Kuenssberg (2/5/13)
Britons rally against ‘Zero Hour’ contracts Al Jazeera on YouTube (4/8/13)
Anger at Amazon working conditions Channel 4 News (1/8/13)
Government to include Amazon in its zero hours probe Channel 4 News (2/8/13)
Councils using zero hours contracts BBC London, Warren Nettleford (31/7/13)

Podcasts

The real economy: Labour market BBC Today Programme, Evan Davis (24/8/11)
Zero hour contracts ‘just the norm’ BBC Today Programme, Rochelle Monte and Peter Cheese (5/8/13)

Articles

Zero-hours contracts: One million British workers could be affected Independent, Nigel Morris (5/8/13)
Zero hours contracts “spreading like wildfire”, official stats show Union News, Pete Murray (1/8/13)
Zero-hours contracts: what are they? The Guardian, Phillip Inman (30/7/13)
Buckingham Palace uses zero-hours contracts for summer staff The Guardian, Simon Neville, Matthew Taylor and Phillip Inman (30/7/13)
Nick Clegg: business department will investigate zero-hours contracts The Guardian,
Patrick Wintour, Simon Neville, Matthew Taylor and Phillip Inman (31/7/13)
Zero-hours contracts are not unavoidable The Guardian, Phillip Inman (1/8/13)
ONS admits it underestimated number of zero-hours contracts The Guardian, Simon Neville (1/8/13)
Zero-hours contract workers – the new reserve army of labour? The Guardian, Philip Inman (4/8/13)
Zero-hours contracts cover more than 1m UK workers The Guardian, Simon Goodley and Phillip Inman (5/8/13)
Zero-hours contracts use by councils needs to be moderated The Guardian, Vidhya Alakeson (5/8/13)
If zero-hours contracts are driving this ‘recovery’, it’s a lousy kind of recover The Guardian, Deborah Orr (9/8/13)
ONS increases its estimate of workers on zero hours contracts Financial Times, John Aglionby (1/8/13)
Zero Hours Herald Scotland, Ian Bell and Scott Dickson (4/8/13)
Sports Direct protests planned over zero hours contracts Channel 4 News (3/8/13)
Cable warns of exploitation of zero-hours contracts BBC News (5/8/13)
Q&A: What are zero-hours contracts? BBC News (5/8/13)
Record number of 16-24s on zero hours contracts at work BBC Newsbeat, Jim Reed (15/5/13)
Figures show 18-24s most likely on zero-hours contract BBC Newsbeat, Jim Reed and Amelia Butterly (5/8/13)
Andy Burnham calls for ban on zero hours contracts BBC News (28/4/13)
Zero-hours contracts: What is it like living on one? BBC News, Sean Clare (5/8/13)
Small Talk: Zero-hours contracts? Key for growth Independent, David Prosser (5/8/13)
Zero Hour Contracts Manchester based law firm, Emma Cross (30/7/13)

Data

People and proportion in employment on a zero-hour contract ONS (31/7/13)
Estimating Zero-Hour Contracts from the Labour Force Survey ONS (26/7/13)
One million workers on zero hours contracts, finds CIPD study CIPD, Michelle Stevens (5/8/13)
Labour Market Outlook CIPD

Questions

  1. Distinguish between open unemployment, disguised unemployment and underemployment?
  2. Distinguish between functional, numerical and financial flexibility? Which type or types of flexibility do zero-hours contracts give the firm?
  3. Identify the various benefits to employers of zero-hours contracts?
  4. What are the costs and benefits to workers of such contracts?
  5. Identify what forms of flexible contracts are used for staff in your university or educational establishment. Do they benefit (a) staff; (b) students?
  6. Are zero-hours contracts fair?
  7. In what ways do zero-hours contracts transfer risks from employers to employees?
  8. If a company introduces a system of zero-hours contracts, is this in accordance with the marginal productivity theory of profit maximisation from employment?
  9. From the perspective of the employer, how do the benefits of zero-hours contracts compare with other forms of flexible working?
  10. Consider the arguments for and against (a) banning and (b) regulating zero-hours contracts.

There is a growing consensus amongst the political parties in the UK that something needs to be done to end the huge pay rises of senior executives. According to the High Pay Commission, directors of FTSE 100 companies saw their remuneration packages rise by 49% in 2010. Average private-sector employees’ pay, by contrast, rose by a mere 2.7% (below the CPI rate of inflation for 2010 of 3.3% and well below the RPI inflation rate of 4.6%), with many people’s wages remaining frozen, especially in the public sector. (See Directing directors’ pay.) In 1979 the top 0.1% took home 1.3% of GDP; today the figure is 7%.

But agreeing that something needs to be done, does not mean that the parties agree on what to do. The Prime Minister, reflecting the views of Conservative ministers, has called for binding shareholder votes on top executives’ pay. The Liberal Democrats go further and are urging remuneration committees to be opened up to independent figures who would guard against the cosy arrangement whereby company heads set each other’s pay. The Labour Party is calling for worker representation on remuneration committees, simplifying remuneration packages into salary and just one performance-related element, and publishing tables of how much more bosses earn than various other groups of employees in the company.

So what measures are likely to be the most successful in reining in executive pay and what are the drawbacks of each measure? The following articles consider the problem and the proposals.

Articles
Parties draw up battle lines over excessive executive pay Guardian, Patrick Wintour and Nicholas Watt (9/1/12)
David Cameron’s plans for executive pay may not end spiralling bonuses Guardian, Jill Treanor (8/1/12)
Executive pay: what would Margaret Thatcher have done? Guardian Politics Blog, Michael White (9/1/12)
Businesses tell the PM he’s wrong about ‘fat cat’ pay Independent, Nigel Morris (9/1/12)
Directors’ pay is not the Government’s business The Telegraph, Telegraph View (9/1/12)
I’ll end merry go round of bosses’ pay, says David Cameron Scotsman (9/1/12)
Find a place at the table for public interest directors Scotsman, leader (9/1/12)
Cameron vows executive pay crackdown Financial Times, George Parker (9/1/12)
Q&A: Voting on executive pay BBC News (8/1/12)
Will shareholders crack down on executive pay? BBC News, Robert Peston (8/1/12)
Why didn’t investors stop high executive pay? BBC News, Robert Peston (9/1/12)

Report
Cheques With Balances: why tackling high pay is in the national interest Final report of the High Pay Commission (22/11/11)

Questions

  1. Why has the remuneration of top executives risen so much faster than average pay?
  2. What market failures are there in the determination of executive pay?
  3. What insights can the theory of oligopoly give into the determination of executive pay?
  4. Compare the proposals of the three main parties in the UK for tackling excessive executive pay?
  5. To what extent is it in the interests of shareholders to curb executive pay?
  6. Why may it be difficult to measure the marginal productivity of senior executives?
  7. To what extent would greater transparency about pay awards help to curb their size?
  8. What moral hazards are involved in giving large increases in remuneration to senior executives?

The world’s population is set to go on rising – at least to 2050. And as population rises, so will the demand for food. But here we come up against a potentially catastrophic illustration of the law of diminishing returns. Population is set to grow, but the world supply of land is pretty well fixed. And with global warming, some land may become unusable.

According to Sir John Beddington, an expert in population biology and lead author of a government-commissioned report, The Future of Food and Farming, there could be serious consequences of this population rise, including rapid rises in the demand for food, rising food prices, rising land prices, the degradation of land, growing food poverty in many developing countries, growing political unrest and serious environmental damage. As the report’s Executive Summary states:

The global food system will experience an unprecedented confluence of pressures over the next 40 years. On the demand side, global population size will increase from nearly seven billion today to eight billion by 2030, and probably to over nine billion by 2050; many people are likely to be wealthier, creating demand for a more varied, high-quality diet requiring additional resources to produce. On the production side, competition for land, water and energy will intensify, while the effects of climate change will become increasingly apparent. The need to reduce greenhouse gas emissions and adapt to a changing climate will become imperative. Over this period globalisation will continue, exposing the food system to novel economic and political pressures.

Any one of these pressures (‘drivers of change’) would present substantial challenges to food security; together they constitute a major threat that requires a strategic reappraisal of how the world is fed.

The report specifically looks at five key challenges for the future:

A. Balancing future demand and supply sustainably – to ensure that food supplies are affordable.
B. Ensuring that there is adequate stability in food prices – and protecting the most vulnerable from the volatility that does occur.
C. Achieving global access to food and ending hunger – this recognises that producing enough food in the world so that everyone can potentially be fed is not the same thing as ensuring food security for all.
D. Managing the contribution of the food system to the mitigation of climate change.
E. Maintaining biodiversity and ecosystem services while feeding the world.

So what can be done and how realistic are the policy solutions? The following broadcasts and articles examine the arguments

Webcasts and podcasts

Scientists warn of huge pressures on food production BBC News, Pallab Ghosh (24/1/11)
Global food stocks face crisis, says chief scientist BBC News, interview with Professor Sir John Beddington (24/1/11)
‘No easy solution’ to global hunger BBC Today Programme, interview with Professor Sir John Beddington (24/1/11)

Articles

Britons must swallow fear of GM crops to feed world Observer, Robin McKie (23/1/11)
Genetically modified crops are the key to human survival, says UK’s chief scientist The Telegraph, Louise Gray (24/1/11)
Report: Urgent action needed to avert global hunger BBC News, Pallab Ghosh (24/1/11)

Report

Foresight. The Future of Food and Farming (2011), Final Project Report The Government Office for Science, London (24/1/11) (link to sections of the report and to the evidence base)
Full Report
Executive Summary

Questions

  1. Summarise the main findings of the report.
  2. Does increasing the output of food per agricultural worker contradict the law of diminishing returns? Explain.
  3. What are the current failings of the system of global food supply?
  4. Why are problems of food supply likely to intensify?
  5. What externalities are involved in global food production? What impact do these have?
  6. In what ways might the externalities be internalised?
  7. What are the benefits and dangers of new technologies as means of increasing food supply?
  8. To what extent do the goals of increasing food supply and environmental sustainability conflict with each other?
  9. Explain the main drivers of change that affect food supply and demand? In what ways do these drivers interact with each other?
  10. “Although the challenges are enormous there are real grounds for optimism.” Explain the report’s authors’ thinking here.

Two reports released by Incomes Data Services tell dramatically contrasting stories about pay in the UK. One report focuses on average pay in the public and private sectors, which are both likely to fall in real terms in 2011. Most public-sector workers will see a freeze in their wages and, whilst private-sector workers’ pay could rise by an average of 3%, this will still be below the rate of inflation. The press release Pay awards may rise but will trail inflation (6/1/11) to the report stated that:

Private sector pay settlements in 2011 could well be higher than in 2010, as long as the economic recovery remains on track. But following the latest increase in VAT, they are likely to trail inflation, meaning that the cost of living may be set to rise faster than average pay settlements for the second year running.

However, the press release to an earlier report, FTSE-100 bosses see earnings rise 55% (29/10/10), stated that:

FTSE-100 directors saw their total earnings boosted by an average of 55% while across the FTSE 350 as a whole total board pay went up by an average 45%, according to the latest Directors Pay Report, published by Incomes Data Services. (Year to June 2010)

On the back of these increases FTSE 100 chief executives took home £4.9 million on average in total earnings during the year.

Meanwhile, there is continuing public outcry over the levels of bank pay and bonuses. Despite billions of pounds of public money having been poured into banks to prevent their collapse, bank bosses are set to receive huge remuneration packages worth several million pounds in some cases. And, despite being condemned by the government, it seems there is little it can do to curb them.

So what are the causes of the growing income divide between those at the top and everyone else? And what are the economic consequences? The following articles explore the issues.

Articles: IDS reports
Year of pain predicted for workers.. while bosses’ salaries continue to grow Daily Record, Magnus Gardham (7/1/11)
Another 12 months of pay freeze misery for workers… but bosses enjoy a huge 55% salary increase Daily Mail, Becky Barrow (6/1/11)
Private-sector pay set to trail behind inflation People Management, Michelle Stevens (6/1/11)
Private pay deals to lag behind inflation Financial Times, Brian Groom (6/1/11)
UK boardroom pay rises 55% in an age of austerity Guardian, Simon Goodley and Graeme Wearden (29/10/10)
Private sector pay ‘to trail inflation’ in 2011 BBC News (6/1/11)
Staff morale warning over bosses’ pay rises Independent, Jon Smith (6/1/11)
‘Dose of reality’ call over top pay BBC Today Programme, Robert Peston, Brendan Barber and Garry Wilson (6/1/11)
‘Severe squeeze’ on average pay BBC Today Programme, Ken Mulkearn (Editor of the Incomes Data Services pay review) (6/1/11)
UK inflation rate rises to 3.7% BBC News , Ian Pollock (18/1/11)

Articles: bankers’ bonuses
Bank bonuses ‘to run to billions in 2011’ BBC News, (7/1/11)
Cameron says banks ‘should pay smaller bonuses’ BBC News, (9/1/11)
David Cameron warns RBS over bonuses Guardian, (9/1/11)
Banks say ‘no’ to bonus backdown Management Today, Andrew Saunders (7/1/11)
Banks to pay out billions in bonuses BBC News blogs: Peston’s Picks, Robert Peston (6/1/11)
Why government can’t stop big bonus payments BBC News blogs: Peston’s Picks, Robert Peston (7/1/11)
Diamond: ‘I am compelled to pay big bonuses’ BBC News blogs: Peston’s Picks, Robert Peston (11/1/11)

Data
Average Weekly Earnings Incomes Data Services

Questions

  1. Why are average earnings likely to be less than the rate of inflation in 2011?
  2. Why were the directors of the FTSE 100 companies paid an average 55% pay increase for the year to October 2010?
  3. To what extent can marginal productivity theory explain the huge increases of bosses of top companies?
  4. If remuneration committees base executive pay increases on the average of the top 25% of increases of equivalent people in other companies (to stop ‘poaching’), what will be the implications for executive pay rises over time?
  5. What market failures are there in determining executive pay?
  6. What will be the implications for staff morale if their earnings are falling in real terms while their bosses are receiving huge pay increases? Should these implications be taken into account when deciding executive remuneration packages?
  7. Are shareholders in FTSE 100 companies likely to welcome the pay increases of their top executives? If so, why? If not, why not?