Labor Contracts as Partial Gift Exchange

TLDR

Workers’ effort is shaped by norms that define what constitutes a fair day's work. The paper explains involuntary unemployment as firms’ responses to workers’ group behavior and proposes a theory dividing labor markets into primary and secondary sectors. Firms influence norms by paying above the market‑clearing wage, creating primary industries that consistently pay more and secondary industries that pay only the market‑clearing wage. The study finds that labor markets split into primary and secondary sectors based on wage levels relative to the market‑clearing wage.

Abstract

This paper explains involuntary unemployment in terms of the response of firms to workers' group behavior. Workers' effort depends upon the norms determining a fair day's work. In order to affect those norms, firms may pay more than the market-clearing wage. Industries that pay consistently more than the market-clearing wage are primary, and those that pay only the market-clearing wage are secondary. Thus, this paper also gives a theory for division of labor markets between primary and secondary.