Coordination problem in informal job market

Abstract

In developing countries like India, the retail chains find themselves caught in a trap called low equilibrium trap. The retail stores hire a certain number of non-contractual employees. Employees, due to harsh working conditions and availability of better opportunities, tend to have high turnover rates. Reacting to this, firms hire more than the required number or more than the optimal number of employees. This leads to higher wage expenses, higher search and recruitment costs and uncertainty in the labor force. This forces the companies to pay further lower wages. The vicious cycle continues.