Fluctuations and rigidities in local labor markets, part II: reinterpreting contract theory

Local labor markets are characterized by rigidities in their patterns of adjustment to short-run fluctuations. With or without unions, fluctuations in employment, hours worked, and money wages are unlike the patterns predicted by conventional discrete-exchange labor-market theories. Moreover there are distinct geographical and industrial patterns in the observed rigidities. Neoclassical implicit contract theory has been vindicated. Or has it? Obvious empirical difficulties remain, especially with regard to predicting which adjustment variable has precedence. There are conceptual shortcomings as well, evidenced by ad hoc assumptions of cooperative wealth maximization. By integrating the underlying structure of inequality with the processes of production and exchange, principles of an alternative conceptualization of contract theory are sketched and their implications noted for a set of hypothetical local labor markets. Based upon these arguments a research agenda for analyzing the relational character of local labor markets is briefly outlined.