| Abstract: | This paper deals with a recent development in labour economics - that of implicit contract theory. A major impetus to its development has been the existence of involuntary unemployment and wage rigidity. In reality, there have been two streams of development - one associated with the name of Okun which focusses on the fixed costs of employing labour and the importance of reputation for reliability on the part of employers. The other emphasises differences in risk-aversion between employers and workers, viewing the implicit contract as a form of risk shifting. Both theories provide insights into the workings of labour markets, in particular, the pervasiveness of long-term employment relations. although difficulties arise in terms of the enforceability of contracts. The broader literature on internal labour markets in useful in this context. |
