Social Networks and Search Frictions in Day Labour Markets

In South Asia, three quarters of ultra-poor households report casual labour as the dominant form of income. In urban areas, short-term construction jobs are found through social connections or by going to a “labour stand”, essentially an intersection where low-skilled labourers wait each morning for employers looking to hire for a day or two. While spot markets like this are generally thought of to be the free-market ideal, these markets appear to be rife with failures including information asymmetries, wage rigidity and large search costs for employees and employers. The presence of these frictions often increases dependence on social relationships. In this project, Christina Brown and Maryiam Haroon will seek to answer why exactly employers hire workers from their social network, what are the mechanisms at play and, in response to variation in the hiring process, how do workers change their investment in social capital versus productivity?

These questions will be tested through an RCT with a construction firm in Pakistan. Different aspects of the hiring process between contractors and labourers will be varied while observing the resulting effect on hiring patterns by contractors, labourer productivity and labourer investment in their social capital. Three treatments will be implemented. Firstly, an information treatment in which the historical productivity of a given group of labourers will be revealed to some contractors. Secondly, an incentive treatment in which contractors will be provided cash incentives based on the productivity of the team they hire that day. And thirdly, a contractor-supervisor treatment in which the contractor responsible for hiring the team will also act as their supervisor.

In Pakistan, 85% of construction work and a majority of agricultural labour is contracted through short-term spot markets with inefficiencies affecting SMEs, large firms and many public works projects. Governments usually attempt to reduce these inefficiencies by increasing employment for workers through work guarantees, which tend to be expensive and corrupt, by incentivising firms to hire employees, which does not appear to have long term benefits, or by introducing a minimum wage. Similarly, while policies have been redirected and initiatives have been taken by the current government to help day labourers, there is little to no understanding of the existing market structure. This project aims to bridge this disconnect, focusing on easing search frictions and matching costs. Small changes to the efficiency of this market could increase demand and ultimately employment without introducing distortions in the way other policies typically do.


Christina Brown

University of California, Berkeley

Maryiam Haroon

Lahore School of Economics