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The Elgar Companion to Law and Economics, Second Edition

Edited by Jürgen G. Backhaus

This thoroughly updated and revised edition of a popular and authoritative reference work introduces the reader to the major concepts and leading contributors in the field of law and economics. The Companion features accessible, informative and provocative entries on all the significant issues, and breaks new ground by bringing together widely dispersed yet theoretically congruent ideas.
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Chapter 18: Labour Contracts

Don Bellante


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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