Implicit Contracts, Unemployment, and Labor Market Segmentation

Steffen Altmann, Armin Falk and David Huffman

No 5001, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We analyze the impact of imperfect contract enforcement on the emergence of unemployment. In an experimental labor market where trading parties can form long-term employment relationships, we compare a work environment where effort is observable, but not verifiable to a situation where explicit contracts are feasible. Our main result shows that unemployment is much higher when third-party contract enforcement is absent. Unemployment is involuntary, being caused by firms' employment and contracting policy. Moreover, we show that implicit contracting can lead to a segmentation of the labor market. Firms in both segments earn similar profits, but workers in the secondary sector face much less favorable conditions than their counterparts in primary-sector jobs.

Keywords: incentives; fairness; unemployment; dual labor markets; implicit contracts (search for similar items in EconPapers)
JEL-codes: C92 J64 M55 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2010-06
New Economics Papers: this item is included in nep-bec, nep-exp, nep-lab and nep-mic
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Citations: View citations in EconPapers (2)

Published - substantially revised version published in: Review of Economic Studies, 2014, 81 (1), 30-56

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