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Implicit Contracts, Unemployment, and Labor Market Segmentation

Author

Listed:
  • Altmann, Steffen

    (University of Würzburg)

  • Falk, Armin

    (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 of Labor Economics (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 of Labor Economics (IZA).

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    More about this item

    Keywords

    incentives; fairness; unemployment; dual labor markets; implicit contracts;
    All these keywords.

    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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