ABSTRACT
It is not an exaggeration to say that interactions between buyers and sellers in the labor market are more complicated than in either the goods market or the money market. The reason for this is an intricate and ill-defined division of property rights to a job. Unlike a loaf of bread or a dollar bill, where mere possession gives the owner virtually unlimited rights to dispose of the item in question, employment gives ambiguous property rights to both the employer and the employee. The employer does not own the individual who happens to work for the firm, nor does the employee own the job that he happens to have. The principal cause of the inability to stipulate inviolate property rights to a job is that there is too much at stake, in the sense that the side holding these rights could abuse them. For example, if workers received the property rights exclusively, they presumably could not be fired, even if they were incompetent, lazy, or both. On the other hand, if firms could pay their workers whatever they wanted ex post, they would have difficulty keeping their most productive workers, who would prefer to work for themselves, rather than put up with a capricious employer. As a result, since these property rights to a job cannot be allocated on the basis of some uniformly accepted conditions, they must be negotiated between workers and their employers. These negotiations give rise to fixed costs for both parties and to minimize them they enter into long-term agreements where these property rights are allocated. Worker-employer relationships are often included in contracts, either explicit union agreements that can be enforced in the courts or implicit “hand-shake” arrangements that are binding only to the extent that tradition and a sense of “fair play” make them so. In many instances, contracts represent a sharing of the property rights in the labor market: workers get a wage rate that is guaranteed for the life of the contract and firms are given the opportunity to adjust unilaterally the hours of work and the number of workers that they employ. When contracts are unalterable for some period of time, it is conceivable that transactions can take place in a state of disequilibrium in the labor market, without at the same time requiring involuntary exchange.
