Chapter 14 The employment relationship: Job attachment, work effort, and the nature of contracts

In the U.S. economy, approximately 100 million workers are matched with market work activities on any given day. Millions more are matched with the nonmarket activities of various kinds, including child rearing, the home production of a variety of goods and services, and schooling. Economic efficiency requires that (1) specific individuals and activities be appropriately matched and (2) the individuals, once matched, undertake the activity with an appropriate level of effort or intensity. This chapter discusses the economic forces that influence and define the important aspects of elements of the employment relationship in a market economy. In the chapter, three aspects of the employment relationship are reviewed: (1) the supply of work effort by the employee, (2) the investment in employeremployee match specific skills, and (3) the provision of earnings insurance by the employer. The supply and demand for work effort of individual workers is an obvious and crucial factor in the employment relationship. Employers have preferences about the intensity with which employees undertake their tasks, which may be quite at variance with those of the employees.