Journal of Law and Political Economy

The “freedom of contract” presumption that employment arrangements negotiated between employers and employees are necessarily optimal exchanges between equal parties willfully ignores the fact that workers rarely enjoy full employment. Without full employment, employers enjoy plentiful access to willing new workers, while employees face difficulties finding alternative jobs. Many groups of workers, particularly Blacks and those without college credentials, have higher-than-average unemployment and never enjoy full employment, even when the aggregate economy is thought to be at full employment. Excessive unemployment matters: when unemployment is high, quitting and the ability to switch jobs diminish, unemployment spells are longer, finding a good job is harder, and, correspondingly, wage growth is subdued for low- and middle-wage workers. Employers, though, are able to fill vacancies with qualified workers more quickly and with less effort. Acknowledging the persistent absence of full employment renders the freedom-of-contract framework a flawed basis for assessing employment relationships.