Miliband's zero hours contracts catastrophe

Ed Miliband's latest attempt to screw up a part of the economy is his proposal to legislate on zero hour contracts:

"If you work regular hours for three months, Labour will give you a legal right to a regular contract, not a zero-hours contract."

I have no doubt Ed Miliband isn't ignorant of the fact that such a policy will harm lots of people and help only a tiny few, yet he doesn't seem to care two hoots - he supports the policy because he knows most people will endorse it based on the help for the tiny few while at the same time being wholly oblivious to the wider harm it will do. If you happen to be one of those few to whom that applies, you'll be happy. But for the vast majority, the labour market of supply and demand involves an allocation of resources (work and wages) far beyond the scope of any top-down management, and with far more efficiency than state meddling can achieve. Telling employers they must offer a regular contact after three months (a figure seemingly plucked out of the air) can only harm the efficiency of mutually allocated resources. This isn't anything more than standard first year economics - something politicians seem to be happy to ignore to buy votes.

What Ed Miliband is missing is the most important point. Yes, some people struggle on zero hours - the part of the labour market that contains much of this kind of work is often insecure, unstable and volatile anyway - but the notion that this law will make things better is moonshine. Here's the key point. The labour market of supply and demand is dictated by numerous price signals that generate all kinds of information about the value of labour, the supply of services, length of contracts, and so forth. A dentist can work in the same place for 15 years doing a similar number of hours each day. A sub-contracted painter and decorator can work at dozens of places in that time, with varying lengths of contract. Selling labour is heterogeneous - and you're just not going to be able enforce better pay or more stability without damaging a whole sub-section of people in that labour market.

So it's not that I'm repudiating Ed Miliband's proposal because I've suddenly developed amnesia about the struggles of people's ability to live or the volatility of the market - I'm repudiating it because its implementation will simply alter the behaviour of employees and employers in the market because the vital price signals of information on which the economy runs will be distorted.

It's easy to think of zero hour contracts only in terms of employees, and to imagine most employers to be cold, uncaring exploiters. But it distorts the true reality. Economic policies affect employers as well as employees - and employers are the essential providers in this equation. Make a law that helps low earners and you hinder another group (usually low-skilled employers but also other low earners). Make a law that helps tenants and you hurt another group (usually landlords). Make a law that helps Brits and you hurt another group (usually anyone who isn't a Brit). Nothing comes without a cost.

Employers have lots to consider when they take on people. They have to make forecasts about the future; they have to consider market fluctuations; they have to consider what they should invest; and they have to consider which future state-interference will hamstring them. Zero hour contracts are sometimes opportunities to exploit, but they are mostly opportunities to reduce risk in a frequently unstable market, and create lots of short-term employment.

Think who the beneficiaries might be - students, single parents, those looking for additional employment to top up their main job, and those with multiple part time jobs. The ability to work flexibly as and when they want is a very beneficial thing for them. Ed Miliband's proposal to ruin theirs and their employers' flexibility is narrow and short-sighted.

What Ed Miliband also doesn't understand is that the economic growth is the main vehicle to reduce zero hour contracts for those not happy with them. The reason being job growth increases the necessity for employee stability, which will only diminish the allure of zero hour contracts for both employers and employees, because employers are going to want stability in their personnel. Moreover, as unemployment rates fall and job creation continues to take place, greater power is transferred to jobseekers, which places selection pressure on firmsoffering less desirable contracts. Ironically, Ed Miliband's proposal will uproot some of the stability in the market, which will more than likely go on to have a cobra effect type scenario whereby he contributes to an increase in zero hour contracts - the very opposite of what he's trying to do.

The state's role is to reduce the tax burden for people on low incomes or in volatile parts of the market, and give them the financial help they require, leaving those vital price signals untouched.