Network mechanisms and social ties in markets for low- and unskilled jobs: (theory and) evidence from North-India

Abstract: Workplace referrals may resolve incentive problems that arise due to incomplete contracts. We use an in-depth primary data set covering low- and unskilled migrants from Western Uttar Pradesh (India), to examine this and alternative explanations for referral-based recruitment. We find little evidence of referral screening for unobservable worker traits, but some support for a hypothesis of referral as a mechanism to enforce workforce discipline. Two observations back this conjecture: the high prevalence of strong kinship ties between referees and new recruits and that those who recruit are in more ‘prestigious’ jobs and therefore have higher stakes vis-à-vis their employer. These main findings are exposed to robustness checks to rule out rival explanations: that entry through a workplace insider merely reflects privileged access to job vacancy information; that workplace clustering results from preferences for working together or that the higher prevalence of referral for very young migrants that we observe may reflect that referral has an insurance dimension.