Social Norms as a Determinant of Aggregate Labor Supply

In developing countries, the individuals that participate in the same localized market often share social ties—creating scope for collective behaviors that can generate market power. We test whether large groups of decentralized workers implicitly cooperate to prevent downward pressure on wages, using a field experiment with existing employers in 183 local labor markets in rural India. Only 1.8% of agricultural workers are willing to accept jobs below the prevailing wage despite high unemployment, but this number jumps to 26% when this choice is not observable to other workers—indicating substantial distortion in the aggregate labor supply curve. In contrast, social observability does not affect labor supply at the prevailing wage. In addition, workers are willing to pay to sanction those who accept wage cuts. Consistent with aggregate implications, measures of social cohesion correlate with downward wage rigidity and its unemployment effects across India. In line with our experimental evidence, sellers in other decentralized spot market settings in India and Kenya state they would be unwilling to adjust prices downwards, and would face strong social and economic repercussions if they do so. In developing countries, market power may be more widespread than previously believed.