This dissertation aims to apply a contract approach to studying the process of employment reform at the Chinese state-owned enterprises (SOE), organizational changes as well as institutional evolvement that shape the process and interactions of the main involved actors. Based on existing economic studies on the contract, this research is among the first to develop an analytical framework of the contract specially for the study of labor and employment at both institutional and organizational levels. The analysis explains how the employment contracts by which particular employment relationships are configured determine the utilization of labor resources and the related income allocation. The framework is then used to investigate, given the “socialist market economy with the Chinese characteristics”, how did SOE transform its employment system through various stages of the reform and how were enterprises and employees affected. Through a comprehensive fieldwork research which included interviews with employees at selected industrial SOEs in China and a few case studies, it is found that the rapid development of the labor market driven by China’s economic reform in general and the remarkable progress in the property rights development at the utilization of human capital have been the major forces advancing the SOE employment reform. However, a double-layer allocation structure governing the rights allocation between the state, the SOE and SOE employees is considered to be the dominant institutional constraint that renders the reform process full of transaction cost and thus less efficient. In addition, by using the experimental method, this research also suggested the significance of performing property rights in the benefit allocation decisions by people with certain behavioral patterns in the contract. The experiment results offer a distinctive view of the choice architecture for understanding the income distribution in the SOE employment reform. The research findings indicate the relevance/value of a contract approach in the analysis of institutional changes concerning the utilization of economic resources such as labor; they help to understand those institutional constraints that may significantly affect the efficiency of resource use and income allocation. For the SOE employment reform or the general economic reform in China, understanding those inherent institutional constraints is the key to evaluating certain policies and requires further studies; in the meantime, the application of a contract approach will shed light on new thinking on more effective reform measures in the future.