The Contract Theory of Employment

The Contract Theory of Employment suggests that employment relationships are based on mutual agreements between employers and employees, where each party has specific expectations, rights, and obligations. Employers seek to secure skilled labor and productivity, while employees look for fair compensation and job security. To balance these interests, they create contracts that outline roles, responsibilities, wages, and conditions. These contracts reduce uncertainty, promote trust, and align incentives, helping both parties work effectively together. Essentially, employment is viewed as an organized arrangement formed through negotiated contracts to ensure mutual benefit.