Long Term Labor Contracts

Long Term Labor Contracts


Long Term Labor Contracts

            The foundation of an employee-employer relationship is the contract that is agreed upon by both parties prior to official employment. All the terms and regulations are stipulated in the contract to ensure that the potential worker comprehends on what is expected (Bárcena-Ruiz, & Campo, 2000). According to legal terms, long-term labor contracts is described as an agreement between an employer and employee on the duration of performing work which amounts to a minimum of 5 years. The contract in itself is considered comprehensive requiring neither revision nor renegotiations as all the terms are stipulated prior being agreed upon (Siebert, 1988). This type of contracts is structured in that the allow workers to secure long-term wages that are usually higher that casual wages and guarantees a steady income for the employee. However, there exists a flip side that does not necessarily serve or contribute towards the greater good of the workers or firm. It is influenced by a short-listed four kinds of opportunistic behavioral points that are associated with malfeasance (Grundmann , Cafaggi & Vettori, 2013). Long-term labor contracts are beneficial to the worker but like most agreement, there exists loopholes that are manipulated in an attempt to compromise its validity.

            The creation of a model of a long-term labor contract is an important tool in addressing these issues that arise from the agreements. Regardless of the fact that some of these problems have addressed singly, there should be a model that illustrates how they are symmetrical to one another. The model that exists currently focuses on both sides of the contract, which are effort and wages. It clearly depicts the perception that there is a probable chance that salaries increase much faster than subsidiary goods and illustrates some of the implications applied by unionism that act on the behalf of the workers to ensure that policies are enforced  including the retrenchments of workers following a disciplinary issue (Grundmann , Cafaggi & Vettori, 2013). The model is used to study the relationship between the unions and how it is affected by factors such as age and the efficiency displayed in playing out its role.

            The long-term contract that is signed by the employer and the employee can be termed as a give and take agreement where both parties supply services to one another. The employer is responsible of supplying the salaries and other remunerations that are included in the agreement and in turn receive the supply from the worker that can be loosely termed as ‘effort’ (In Polachek & In Tatsiramos , 2008). This contract can be broken by either party in to scenarios: an attempt of changing the terms and conditions agreed upon which is considered as renegotiation or the withdrawal by the unwilling party. The understanding of the aforementioned points paves way to the acknowledgement of how the four problems arise. Due to instances of such termination that spontaneously, modeling of the contracts, takes into account the four major issues that may arise. An employee may choose to resign from the organization in an attempt to neglect the obligation of the contract when a chance of a better paying job presents itself. Secondly, an organization can fire a worker whom they are indebted to. These two scenarios form the first part of the malfeasance present in a long-term contract. They are categorized under unilateral withdrawal. The next case is where the worker decides to reduce on the amount of effort that was agree upon or come up with strategies through which they increase their wages by stealing from the company. The malfeasance by the company is the last of the scenarios. The company’s decision to allow the deterioration of the working condition of the work place concludes the list of malfeasances that may affect the validity of a long-term contract (In Polachek & In Tatsiramos , 2008).

            The major problem that arises concerning the contracts is that they do not include the repercussions of the above-mentioned malfeasances. The various models created addressed these problems lightly and focused more employment policies and salaries that bound both parties and affected the reputation of the organization. After the realization that employees were at liberty to resign, it prompted its incorporation in newer models such as the Grossman and Holmstrom. These two individuals formed a model that included the derived implications of the type 1 malfeasance that as mentioned earlier included the resignation of an employee and the termination of employment of a worker owed by the company (Palokangas, 2000). However, this model was out ruled as it still relies on the reputation of the company without incorporating the satisfaction of the employees. The next that was proposed was by Hashimoto and Yu (1980) and Hall and Lazear (1982). Despite the contract not overlooking the issue of reputation, it demanded that the wage and efforts should be enlisted as part of the term in the contract. As regards to the termination, it could be done unilaterally. A number of other models were formulated that dealt with the issue of companies eliciting effort from its employees. These models include that by Eaton and Rosen (1981) and Rosen and Lazear (1981)

             The current model utilizes the techniques in the Lazear’s models where focused in placed primarily on the issuing of salaries over the duration of life cycle. The structure of the model is explained in three stages which include the limitations that are created by the four types of malfeasance, the existence of stiff neck competition in the labor market and the maximum conditions and constrains that are stipulated in the contract (Palokangas, 2000). In dealing with the effects of the four type of malfeasance, they are categorized into 2 groups, type 1 and type 2. In type 1, the conditions that should be placed to avoid quitting and dismissals by the workers and employees in an attempt to avoid fulfilling their obligation as outlined in the category, is that they are expected to perform much better during the remainder of the contract (Siebert, 1988). In type 2, the response of either party forms the basis on whether either party will lesson the effort or not. The nature of the response is variable and cannot be determined as it can occur at any particular point within the duration of the contract. There are two types of responses in the first case; the affected party recognizes a threat posed by the other thus terminating the contract by withdrawal while the other s whereby there is no detected threat thus the withdrawal of either party is considered as cheating (Siebert, 1988).

             This model has been successful thus far in illustrating how the malfeasances should be handled. The understanding of how the models of the contracts have evolved paves way to more ideas being conjured up that can assists in improving the current model. Long-term, labor contracts should be seen as opportunity for both company and the employer not as a means through which one party benefits from the other. The relationship should be mutualism, where both benefit and do not feel cheated during the duration of the employment.


Bárcena-Ruiz, J. C., & Campo, M. L. (January 01, 2000). Short-term or long-term labor contracts. Labour Economics, an International Journal, 7, 3.)

Grundmann, S., Cafaggi, F., & Vettori, G. (2013). The organizational contract: From exchange to long-term network cooperation in European contract law. London: Ashgate.

In Polachek, S. W., & In Tatsiramos, K. (2008). Work, Earnings and Other Aspects of the Employment Relation. Bingley: Emerald Group Pub.

Palokangas, T. (2000). Labour unions, public policy and economic growth. Cambridge: Cambridge University Press.

Siebert, W. S. (1988). Simple models of compensation systems and long term labor contracts. Birmingham [England: University of Birmingham, Dept. of Industrial Economics and Business Studies.

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