Rules, Contract, and Institution in the Wage-Labor Relationship: A Return to Institutionalism?

By Bazzoli, Laure; Kirat, Thierry et al. | Journal of Economic Issues, December 1994 | Go to article overview

Rules, Contract, and Institution in the Wage-Labor Relationship: A Return to Institutionalism?


Bazzoli, Laure, Kirat, Thierry, Villeval, Marie-Claire, Journal of Economic Issues


-----. Legal Foundations of Capitalism. New York: Macmillan, 1924.

-----. Institutional Economics. Its Place in Political Economy. Vol. 1. Transaction Publishers, 1990.

-----. The Economics of Collective Action. 1950. Reprint. Madison: The University of Wisconsin Press, 1970.

Commons J. R., and J. B. Andrews. Principles of Labor Legislation. 2d ed. New York: Harper and Brothers Publishers, 1920.

Defalvard, H. "Critique de l'individualisme methodologique revu par l'economie Recent research in labor economics is characterized by increasing interest in the nature of the labor contract. There is something close to consensus that the wage relationship can best be understood by recognizing that labor contracts are "incomplete" because they cannot be reduced to mere market contracts.

Reexaminations of the nature of the wage relationship lead to consideration of its institutional nature. Nevertheless, in the theoretical literature, contractual relationships are not always incorporated in a real institutional relationship. The interests of French and American institutional economists of the early twentieth century are reflected in the works of contemporary labor economists; it is therefore interesting to compare current work with the analyses of these early institutional economists. Convergences and divergences concerning the contractual and institutional dimensions of the wage-labor relationship will be emphasized in order to stress the potential of an institutionalist approach.

Our examination of orthodox and heterodox theories of the wage relationship draws upon the debate in the United States about the relationships and the fundamental divergences between "old institutionalism" and "new institutionalism" [Hodgson 1991; Jacoby 1990] as well as upon the institutionalist nature of labor economics [Ramstad 1981]. This literature has not attracted much attention in France, partly because little is known about old institutionalism. In addition to the examination in this paper of new developments in neoclassical theory and the "New Institutional Economics," our purpose is to analyze theories current in the French debate concerning the status of labor institutions and to compare them with institutionalist foundations.

Incompleteness of the Labor Contract and Rules in the Wage Relationship: A Contractual Relationship?

Recent developments in the theoretical analysis of the labor contract are part of a process of reappraisal of the Walrasian model of the wage adjustment as a condition for labor market equilibrium. This reappraisal takes the form of either contesting the realism of assuming an auctioneer (which allows disequilibrium theories with the possibility of underemployment equilibria by means of false prices and rationing, and therefore adjustment by quantities), or of emphasis on the particularities of the labor contract and of the labor itself. The intent is to give economic rationality to wage rigidities and to involuntary unemployment, partly by making the assumed individual more sophisticated through the development of the theory of contract and principal-agent relationships, and partly by the consideration of social norms or institutional features of the labor market [Solow 1990]. Contract theory tries to integrate rules into the market model through general questioning of "the way by which the exchange can be guaranteed in case of uncertainty about the quality of the product involved in the transaction" [Eymard-Duvernay 1987, 10].

The integration of qualitative uncertainty into economic analysis, and particularly into the labor relationship, leads to questions about the specific nature of both the wage relationship and labor: can the wage relationship be a pure market relationship? Is labor a mere commodity?

Recent neoclassical research considers the wage relationship as a specific contractual relationship. Its peculiarity is the nexus of mutual commitments, which make it incomplete and different than an exchange of goods. …

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