Most workers have one employment contract that is explicit and another one that is implicit. The explicit employment contract specifies working hours, compensation, and job tasks. The implicit contract involves expectations about the extent to which the employment relationship is not just a payment for labor on the spot market but instead is likely to continue over time. The possibility of a longer-term commitment between an employer and its employees in turn has a number of implications: for example, whether firms will seek to avoid mass layoffs unless or until absolutely necessary; whether firms may cushion the wages and compensation of employees to some extent from broad swings in the economy; whether employees will show some degree of loyalty to the firm; and what kind of investments in human capital the firm will be willing to finance. From the standpoint of the economic risks faced by households, one of the single biggest concerns is the risk of job loss—and in particular, the risk that employers may be doing less recently than they might have done in the past to shield employees from this risk. By its nature, the provisions of the implicit employment contract cannot be observed directly. However, it is possible to compile a range of evidence bearing on some of the central issues relating to why employers decide to trim jobs; why and how firms decide to lay off employees; job tenure and the length of time that a worker can expect to remain with an employer; how job loss affects workers in terms of subsequent wages and health; and the effects of job loss on short- and long- run corporate performance. This paper will argue that, along a number of these dimensions, the nature of the worker-firm employment relationship may have changed substantially in recent years—a group of changes that as a whole have negatively affected the lives of workers and produced modest, if any, benefits for firms. This erosion of the implicit employment contract suggests that if employers have become less involved with cushioning the blow of unemployment and avoiding layoffs where possible, then public policy might have a role to play in spreading the burden of a down labor market so that the burden is not borne so heavily by those who lose their jobs entirely.
© American Economic Association. Final version published as: Hallock, K. F. (2009). Job loss and the fraying of the implicit employment contract [Electronic version]. Journal of Economic Perspectives, 23(4), 69-93. DOI: 10.1257/jep.23.4.69 Reprinted with permission. All rights reserved.
“Job Loss and the Fraying of the Implicit Employment Contract,” Journal of Economic Perspectives, 23(4), January 2009, 69-93.