The formation of implicit contracts in labor markets with heterogeneous employees is studied. If layoffs occur, the firm finds it optimal to offer differing contracts to differing employees, with employees who place a higher priority on leisure accepting contracts with higher layoff probabilities. The firm can do so without violating the constraint that employees voluntarily sort themselves into these contracts. Under plausible assumptions, the contracts match the empirical observation that relatively low wage rates and high unemployment probabilities tend to be correlated. Finally, an average or composite wage rate varies over states of nature, calling into question the ability of implicit contracts models to account for the constant, representative wage rate often found in macroeconomic models.

This article quantifies the role of plant construction, expansion, contraction, and closing in generating net and gross changes in U.S. manufacturing employment over the 1963-82 period. A new longitudinal data set, constructed from the plant-level observations collected in the last five Census of Manufactures, is utilized. The reallocation of employment opportunities across and within sectoral, regional, and cohort boundaries is measured. Over 70% of the turnover in employment opportunities occurs across plants within the same two-digit industry and geographic region. Systematic differences in the employment fluctuations of plants of different ages are also found.