Implicit labour contracts in hierarchical firms : some theoretical considerations

Abstract

This thesis is a theoretical study of employment relations between hierarchical firms and individual workers. The focus point is on the characteristics of the optimal contracts that are implicitiy entered into between the two parties. The role of hierarchical firms in the collection of information about the worker's abiUty is investigated. It is shown that, when the firm uses this information to decide its job assignments/promotions and job signalling exists in the labour market, the possibility of quitting results in an upward sloping wage profile for the high ability worker, a downward rigid wage profile for the low ability worker, and the worker's initial wage being less than his expected average productivity. These conclusions remain unchanged when there are more than two perceived ability levels, or the firm offers two possible career structures to its workers. Another function of the hierarchical firm is the imposition of supervision to prevent its workers from shirking. When this activity is added to the production and insurance activities, it is shown that the conclusions of the symmetric information implicit labour contract must be modified : invariant wage income across states does not necessarily hold and the optimum employment level changes. The existence of the supervision activity in the firm also precludes work sharing as a way of eliminating involuntary unemployment. A hierarchical firm can also be treated as an internal labour market where junior/unskilled workers and senior/skilled workers interact. The senior workers transmit skills (either general or specific) to junior workers and provide them with promotion prospects, and the firm can recruit skilled workers from outside. Under these circumstances the conditions under which wages do not equal marginal value product of labour are fully investigated. This approach also provides an explanation for why a worker's wage profile may diverges from his product profile