Real options? Labor contracts in an uncertain world

The standard labor contract is increasingly replaced by flexible and diverse alternative work arrangements. We discuss, in the context of firm labor demand when product demand and costs are uncertain, real options, the right but not the obligation to flexibly adjust firm labor input. We investigate when flexible contracting has real option value, interpret the conditions where flexible contracts are preferred and compare theoretically derived to actual labor contracts. We assess the value of flexibility to firms and workers and suggest how sharing the real option value through higher wages and Unemployment Insurance can ensure that real options benefit all.