Theories of the Employment Relationship: Choosing between Norms and Contracts

The employment relationship is the construct at the heart of any industrial relations system. Most workers are employed inside firms, and their dealings with their employer are thus partially outside the protections offered by whatever competitive forces operate in the labor market. This appears to leave nonunion workers without much protection against unfair outcomes and unfair dealings to the extent that the firm has an unequal bargaining advantage. Although there are many commentators who believe that the system works badly, it can be argued that nonmarket mechanisms have evolved that provide substantial, if incomplete, protection to workers. In this paper I analyze labor market theories that address this issue, particularly how an employment relationship can work when it appears to be entirely one-sided and stacked in favor of the firm. In so doing, I analyze the choice of norms versus contracts as a method of forming agreements to guide the relationship and the extent to which these methods are either self-enforcing or require judicial enforcement.1 2 THEORETICAL PERSPECTIVES ON WORK AND THE EMPLOYMENT RELATIONSHIP To address this question, it is necessary to analyze the three types of labor market relationships that are prevalent in the economy. The first is the labor service market, an externa