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Implicit Contracts, Unemployment, and Labor Market Segmentation

Author

Listed:
  • Altmann, Steffen

    () (University of Copenhagen)

  • Falk, Armin

    () (briq, University of Bonn)

  • Huffman, David B.

    () (University of Pittsburgh)

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.

Suggested Citation

  • Altmann, Steffen & Falk, Armin & Huffman, David B., 2010. "Implicit Contracts, Unemployment, and Labor Market Segmentation," IZA Discussion Papers 5001, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp5001
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    References listed on IDEAS

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    Cited by:

    1. Angelova, Vera & Güth, Werner & Kocher, Martin G., 2012. "Co-employment of permanently and temporarily employed agents," Labour Economics, Elsevier, vol. 19(1), pages 48-58.
    2. Falk, Armin & Menrath, Ingo & Verde, Pablo Emilio & Siegrist, Johannes, 2011. "Cardiovascular Consequences of Unfair Pay," IZA Discussion Papers 5720, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    dual labor markets; unemployment; fairness; incentives; implicit contracts;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • M55 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Contracting Devices

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