Planning, Stochastic Shocks and Labour Contracts of Female Workers and Their Welfare Implications

Abstract

In this paper we analyse labour contracts for female workers when there are planned shifts or stochastic shocks to their leisure preference which arise as a result of planned or unplanned pregnancy. It will be shown that, when female workers plan their pregnancy, contract firms can induce self-selection among workers through a contract that stipulates a wage profile steeper than the spot wage profile so that self-selected workers who accept the contract will not quit. Even though information on shifts in leisure preference is asymmetric, first-best efficiency can be achieved through self-selection. When female workers do not plan childbirths, however, self-selection contracts are not possible. When the stochastic shocks are realized, there will be quits. Planning is Pareto-superior to no planning. At equilibrium workers will be allocated optimally; workers who have low marginal value of home time will join contract firms and make specific investments, while those who have high marginal value will seek employment in the Walrasian market and make no specific investments. Some implications of these results are also discussed in the paper.