How India can solve the Migrant Labor problem: Coalitions, Signaling & Pledges

Migrant labor has been seen as source of low skills and therefore low wage but from construction, masonry, artisanship in jewelry and other crafts or agriculture(which could be of temporary nature) to the more sophisticated ones, we see that large coalitions have found its niches to provide service at competitive costs, both permanently and temporarily as well; in other words in absence of migrant labor the value mismatch would be substantial, not just cost.

These coalitions work in form of informal cooperatives that make village level aggregation possible, as individuals would find it difficult to negotiate that coalitions can do effectively. To draw a critical mass of people to migrate from the interiors of West Bengal or U.P. to the various parts of the country would need several iterations that would make the economics work out where the prices can clear the market. Some skills even cross the borders of India in the same manner.

But when the crisis strikes such that the minimum standards of living cannot be maintained coupled with the uncertainties of the future, reverse migration is the fallout as we see now. But there is a matching problem at play as well.

Let me define this mismatch, there could be large hordes of people available to accept a job prospect in a far off place away from home with required skills, but they cannot be reached or a sizeable mass cannot be formed to initiate a dialogue on migrating. On the other hand a migrant could well be better off continuing in his current situation for just a bit more time than to reverse migrate if some pledges work, but absence of information or communication could well be the reason. This mismatch could play havoc and the very coalitions that worked well to bring groups of people to a place of work that made perfect economic sense now works against the very interest of the individual or the coalition.

Shapley & Roth got their Nobel Prize on the matching problem that involved Game Theory on Coalitions. Their mathematical reasoning could be applied for matching students with University admissions that leaves the optimal allocation through a deferred acceptance program or in the marriage mismatch problem where by holding on to the better compatible option and rejecting the most incompatible option eventually the most compatible pairing can be obtained. These are examples of coalition games with Shapley values at the Core of the problem.

The current migrant crisis in India is a far more complex coalition game. To state the puzzle simply we have a situation created out of uncertainty of livelihood of a group of people stranded far away from their homes and the imaginary payoffs of returning to their homeland has a positive delta to their current payoffs in the distant land without livelihood. The erstwhile stability has got disturbed by the entry of new uncertain elements and absence of clear signaling by various participants has actually increased the instability in the coalitions.

The announcements of food subsidies, cash for work, debt moratorium, collateral free loans in agriculture with much reduced spending requirement at the home base works against the high expenditure with no wage promise looming at large in the distant land.

Sons of the soil could get a preferential treatment as well in terms of disbursements at the time of the crisis and it may be possible that it could extend to many other areas as well.

The motivations to return to home base is not without reason. But the theoretical work done by Shapley and Roth on coalitions, give us some additional clues as to why some coalitions end up with distorted payoffs and the sum of all payoffs do not lead to the stable outcomes.

Without stability, the game collapses and we must look for ways how the coalition can get to a stable outcome.

Such stability can only be provided by pledges and this is where the German Kurzarbeit (Kurz means short and arbeit means work) scheme comes handy. This is a time tested scheme that worked beautifully in every recession and crisis, where the government steps in to provide a part of the wage loss. In most cases it is just one third of the total wage.

The scheme, known as Short Time Work, means that if a worker is not to be employed for the full time work but just one third of the time, he may be still be pledged by the government to cover part of his loss. This has a tremendous impact as far as keeping the worker skills tied to his job; the skills are therefore not lost as a permanent job loss could force the worker to move into other areas, which could end up as a mismatch between his skill and expertise.

Think of a driver who wants to reverse migrate into his home turf and end in an agricultural field, we lose a driver on one hand and add a mismatch of skills as far as agricultural work is concerned. This would have many examples that would make it even more difficult for coalitions to work back.

In the last 2008-09 crisis, Germany employed the Kurzarbeit scheme so effectively that 1.5 million workers came out of the recession without any job loss. The biggest advantage for the economic system was that not only the skills could be retained in the right places, the demand side of the economy could be kept partially oiled.

After all it is the presence of uncertainty around work that makes people stop spending, once the pledges work well, spending can be initiated far more easily. On the contrary reverse migrations acts just opposite of this, it reduces spending further as incomes decline.