Networks, middlemen and other (urban) labour market mysteries

The purpose of this paper is to explore the roles of social networks and intermediares in recruitment and as instruments to control the workforce in lower end urban labour markets in developing countries. The existing literature favours explanations where networks and middlemen are vehicles to disburse information about vacant jobs or screening mechanisms that improve worker-job matches. Intermediaries may also enable employers to evade labour regulations. This paper highlights instead their roles as incentive providers or mechanisms that alleviate behavioural risks in work relations. A novel aspect of this approach is that behavioural risks on both sides of the work relation are considered.

After reviewing the literature, a simple agency model is introduced to suggest new ways to identify whether networks and middlemen alleviate incentive problems in labour relations.

Studies of disparities in labour market access and outcomes are usually anchored in ideas of discrimination. A key insight is that the access to and performance of urban labour markets depend critically on the specific “services” networks and intermediaries extend to workers and employers. This adds an important complication to the evaluation of opportunities for income diversification through rural-urban migration. Under some circumstances, both “institutions” may give rise to strong and persistent exclusion that is likely to vary systematically across sectors of the urban economy. In other circumstances, access restrictions can be remedied through simple policy interventions.

This paper introduces a new and important dimension to the study of urban labour markets as level playing fields.