Edited by Jürgen G. Backhaus
Chapter 18: Labour Contracts
Don Bellante In the United States and in much of Western Europe, only a minority of private sector workers are covered by collectively bargained contracts. Even in the unionized sector where formal explicit contracts exist, the contracts are incomplete, in that they do not specify all of the terms of the employment relationship. Outside the unionized sector, the ‘contract’ between ﬁrm and employee tends to be unwritten, implicit and therefore for the most part unenforceable in courts of law. The primary task of the social scientist is to explain why the implicit, incomplete form of contract is the overwhelmingly dominant form, while the secondary (but more difﬁcult) task is to explain the consequences of the dominance of implicit over explicit labour contracts. In one sense, the explanation as to why labour contracts tend to be implicit seems obvious: if they are made explicit, they are generally enforceable only on the employer, with employees free to abandon the employment contract at will. This lack of symmetry markedly distinguishes the explicit labour contract from the commercial contract, and employers thus would seem to have no incentive to offer explicit contracts. This explanation is not entirely satisfactory, however, as, even under existing legal conventions, employers might well have an incentive to offer explicit contracts even though such contracts would not bind employees. As long as workers value the security that a formal contract would offer, there are gains to be made by the employer in the form of a lower pay level...
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