The Role of Discouragement in Shaping Long-Term Unemployment

Policy Context

This study explores the determinants of labor supply choices among urban casual laborers in India, where the majority of jobs are in informal labor markets and there are no contracts or other institutions in place that enforce regular labor supply. In particular, the project seeks to understand how certain behavioral mechanisms, such as beliefs about one own’s performance and characteristics as a worker, might affect workers’ labor supply choices, and contribute to high rates of unemployment.

Study Design

With funding from CEGA, the research team traveled to India to conduct focus groups and preliminary scoping with job seekers to design adequate tests for their hypotheses and effective interventions, in preparation for a subsequent randomized evaluation. Researchers conducted surveys with a sample of ~50 construction daily laborers in Chennai, India, and started a small pilot experiment to elicit workers’ beliefs about their job finding probability and expected number of days of labor supply. They also collected observational data on labor market outcomes for these workers

Results and Policy Lessons

The original project sought to understand whether casual workers believe that there are limited returns to job searching (i.e., discouragement effects), though this effect is not represented by the focus group and observational data collected. However, the research team noticed that workers in the sample tended to be over-optimistic about their ability to supply labor and find work, suggesting that over-confidence, rather than discouragement, may have consequences for labor supply, for example, by over-estimating their ability to provide regular labor but working than less desired in practice. Importantly, researchers found that this outcome is amplified by the lack of institutional constraints typical of informal labor markets, suggesting that informality in labor markets generates an additional barrier for the very poor that prevent them from escaping poverty. This has important policy implications because it implies that markets themselves are unlikely to overcome such challenges without intervention.
Long-term results forthcoming.