Theories of the Employment Relationship: Choosing between Norms and Contracts

Abstract:     
In this paper, I analyze three types of labor market relationships that are prevalent in the economy - the external labor market that exists outside of firms, and the union and nonunion employment relationships that exist inside firms. The parties' relationships in each of these markets are markedly different from one another with respect to their use of contracts versus norms, their enforcement mechanisms, and their reliance on external competitive market pressures. Why do these very distinct forms exist? This paper provides an answer to this question. To be successful, each of the structures has to resolve problems of match-specific assets, asymmetric information, risk aversion, and transaction costs. The paper describes how the terms of the different labor market relationships work to protect the parties' agreements and the extent to which the terms of the agreement can be interpreted as maximizing joint profit. Finally, I address whether the very different enforcement protections are adequate.

Keywords: Labor market contracting, union versus nonunion, contracts versus norms, enforcement mechanisms

Accepted Paper Series