Question

Explain the concepts of Implicit contracts. Why do employers prefer to have implicit contracts? What is the impact of implicit contracts on the unemployment rate?

Answer 1

Implicit contracts:- Implicit contract refers to mutual agreement formed between the two parties in order to have the smooth trade of goods and services either by law nor by mutual understanding without any written or any oral agreement. And also the need of purchasing the goods and need for the sale should be fulfilled in both the sides.

They are two types of implied contracts. They are 1) implied-in-fact and implied-in-law contracts.

1) Implied-in-fact contract:- It is the situation of the fulfilling the obligation of both the service provider as well the service user. For example, the student pays the fees to study in the school. Both the parties are abide by the rules of fact.

2) Implied-in-law contract:-  It is the legal contract which both the parties are agreed to sign the agreement. For example Real estate business agreements are signed by both buyer and sellers of the lands.

Employers prefers to use implicit cost because the firms administration wing always supports the adjusting factor in the operational factors of reducing the issues prevailing in rate of the employed labors in the recession period. But the concept of implicit contracts does not take the consider the adjustment of wage rates during recession period. It also not need to be in the form of verbal and written agreements between two parties. It will determine the reputation of the firm in the labor market and encourages the laborers to work with full efficiency.

Implicit contract helps to reduce the unemployment rate at the considerable extent. As firm only concentrates only on solving the issues of imbalance of labor employment of equal distribution among all the regions. So decentralized state of full employment is very essential to rebuild the economic development during recession period. If firms selects the appropriate remedy to solve the issues of employment at the recession, the automatic adjustment of minimum wage level will simultaneously increase the production efficiency of all the laborers at all the production units. By taking quick decision to eradicate the unemployment issue, the firms can use the implicit contract concept by giving equal importance for the increasing the quantity of employment rate.