Etienne Lalé | Macro Paper Warehouse

Zero-hours Contracts in a Frictional Labour Market

Thu, 01 Jan 2026 00:00:00 +0000

Dolado, Lalé, and Turon build a structural equilibrium model of the U.K. low-wage labour market to evaluate zero-hours contracts (ZHCs), employment agreements under which firms are not required to guarantee any minimum working hours and workers may decline any hours offered. The paper’s central question is whether ZHCs raise or lower welfare in general equilibrium, and through which channels. The model features two-sided heterogeneity in a random-search-and-matching environment: firms differ in the volatility of their labour demand, workers differ in their relative preferences for flexible versus regular employment, and wages are fixed at or near the statutory minimum wage. Three mechanisms operate simultaneously. First, a job-creation effect: firms facing highly volatile demand that cannot profitably hire under regular terms enter the market only because ZHCs exist. Second, a substitution effect: some firms that could hire under regular contracts instead post ZHC vacancies, crowding out regular employment. Third, a labour-force-participation effect: workers with a strong preference for flexible schedules join the labour force specifically because ZHCs exist and would withdraw if ZHCs were banned.

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