Wage and employment patterns in labor contracts: Microfoundations and macroeconomic implications

This monograph investigates the behavior of economies in which the trade of labor services occurs through contracts. In contrast to other commodities (such as currencies and many agricultural products), labor is generally not traded in an auction market between anonymous traders." Instead, the employment relationship is relatively long-term and the terms of exchange are specified in a contract between the worker(s) and a firm. While market forces may have influenced the initial matching of workers and firms, it is useful to think of the ex post exchange of labor as being immune to outside market forces in that the levels of employment of wages are not determined directly by current market conditions. Furthermore, these contracts, particularly their wage component, provide insurance and credit which may not otherwise be available to the contractants. Under this interpretation, labor contracts are complex instruments influencing the allocation of labor time and consumption across states of the world and time which may substitute for missing markets. This view of the labor exchange process follows the contributions of Baily [8], Gordon [38] and Azariadis [3] and will form the foundation for our analysis.