DP16843 Zero-hours Contracts in a Frictional Labor Market
We propose a model to evaluate the U.K.’s zero-hours contract (ZHC) – a contract that exempts
employers from the requirement to provide any minimum working hours, and allows employees to
decline any workload. We find quantitatively that ZHCs improve welfare by enabling firms with more
volatile business conditions to create additional jobs. While weaker than job creation, substitution
effects – some jobs that are otherwise viable under regular contracts are advertised as ZHCs –
are sizable and likely explain negative reactions against ZHCs. Our model also assesses increased
labor-force participation from ZHCs which appeal to individuals who prefer flexible work schedules.