Impediments to contract enforcement in day labour markets: a perspective from India

What is it about?

In settings where formal contract enforcement mechanisms (such as courts) are absent, contracts are enforced through informal mechanisms such as trust, kinship, reputation, etc. This paper focuses on one such setting in India’s urban informal economy: the ‘day labor’ market for casual labor. We survey seven such markets in Navi Mumbai (a city on the outskirts of Mumbai), and find considerable incidence of contract enforcement problems in the form of employers reneging on wage payments to laborers. We find that the effectiveness of the informal enforcement mechanisms in large and diverse markets is limited, suggesting that market interventions aimed at facilitating access to formal mechanisms might help overcome the limitations with informal enforcement.

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Why is it important?

First, while the literature has looked at informal enforcement in commercial, credit and rental relationships, this paper is unique in applying this framework to casual labor markets. Second, by focusing on non-contractibility of worker effort, the contract enforcement literature in the labor market context has predominantly looked enforcement problems on only one side of the market. This paper looks at a context where enforcement problems are also present on the other side of the market in the form of employers reneging on wage payments to the laborers.