Zero-hours Contracts in a Frictional Labour Market

We develop an equilibrium search model of the coexistence of regular and flexible work arrangements, calibrated to evaluate the U.K.’s zero-hours contract (ZHC).

We develop an equilibrium search model of the coexistence of regular and flexible work arrangements, calibrated to evaluate the U.K.’s zero-hours contract (ZHC). Our findings reveal mixed equilibrium and welfare effects. ZHCs stimulate job creation among firms facing highly volatile business conditions, increasing total employment but potentially reducing regular jobs. Simultaneously, ZHCs boost labour force participation by attracting individuals who prefer flexible work schedules, which may create more congestion for regular jobs in a random-search environment. Our calibration demonstrates that the macroeconomic consequences of alternative work arrangements depend crucially on the job creation margin and on workers’ valuation of flexibility.