Personal Networks and Non-agricultural Employment: The case of a Farming village in the Philippines

Data from International Rice Research Institute(IRRI) and Foundation of Advanced Studies on International Development (FASID), Tokyo

Introduction

Personal networks play important roles in economic transactions, especially in developing countries. Some of the examples are agricultural marketing, capital mobilization for factory establishment, prevention of tenant farmers shirking etc. This paper is the study, based on an intensive survey of one village in the Philippines, analyzes the effects of personal networks on rural villagers access to nonagricultural occupations and the terms of employment given to them.

The existing literature argues that the use of personal networks facilitates a reduction in transaction costs in labor markets by reducing two kinds of asymmetric information problems. The difficulty for employers to detect job seekers true abilities at the time of their application. Monitoring workers effort after employment. Other issues like search costs can also be reduced by well established personal networks. In this study a methodology is used which quantifies personal networks for the statistical estimation of their impacts. The study focuses on one village in the Philippines, using data collected on agricultural workers in this village and nonfarm employees who came from this village. In the study residents and the emigrants of the village are interviewed.

The study village and occupations

The study village is located about 70 kilometers southeast of Manila capital city of Philippines. This village was first settled in the 1880s, and it has continued its history as a rain-fed rice monoculture village. Until the early 1980s, rice farming continued to be the dominant production activity in this village.

Table 1 shows the number of households by type from 1966 to 2001. It indicates that until 1987 few households engaged solely in nonfarm activities (only seven households or 4%).

In the late 1970s, major improvements in the countrys highway systems, connecting the village to Manila and other major cities. The villagers were able to access nonagricultural job opportunities available at the new industrial areas. Urban industrial activities began to spill over to local towns, encouraging their commerce, construction, transportation, and small-scale manufacturing activities. In the late 1980s, a number of small and medium enterprises, such as garment factories, increased sharply in the vicinity of this village. In the 1990s, following the rapid growth in neighboring ASEAN countries, relatively cheap but high-quality labor in the Philippines attracted foreign direct investment in laborintensive manufacturing.

The initial beneficiaries in the study village of the rising nonagricultural employment opportunities were the educated children of affluent farmers, but later landless laborers also began to take advantage of the emerging opportunities. Conventional employment opportunities for villagers can be classified into four categories:1. The first category is self-employed farming. 2. The second is employment as agricultural laborers by farmers within the village. To serve as agricultural laborers, for which sophisticated skills are not needed. 3. The third category is overseas work, which is common in this village, similar to other parts of the Philippines. 4. The fourth category, self-employment, covers a variety of occupations, such as tricycle drivers, buy-and-sell, and metal craft manufacturing done in the backyards of households.

Besides the occupations of these four categories, the occupations that have been becoming more common in this village in the last decade are nonfarm wage employment other than overseas work. In this article they are classified into:I. Unskilled work at small enterprises. II. Unskilled work at large enterprises, III. Skilled/Technical work regardless of enterprise size.

Nonagricultural wage work is the new path for landless laborers in the village to increase their income levels and living standards. The only to way to attain the new jobs was to invest in education.

Figure 2 shows the distribution of years of schooling by occupation in 2001. Note that the completion years of primary, secondary, and tertiary levels of education are 6, 10, and 14, respectively.

It is obvious from the figure that most of the tertiary school graduates are found only in technical/skilled workers. It is interesting to observe that, although we see that the secondary school graduates are most common in unskilledlabor positions in both small and large enterprises, we can still observe a significant proportion of people having the same level of education in the agricultural laborer group. Existing studies on the labor market in the Philippines show that, in addition to education, the use of personal networks is another important condition to access nonagricultural wage employment. Pinches (1989) shows that most workers are employed at an elevator industry in Manila through family networks. A labor market report in 1993 shows that 40% of the respondents obtained their current jobs through relatives or friends, while only 10% did so from public employment agencies.

The major questions that are addressed in this article are these: i. What kind of personal networks have influenced rural villagers access to different kinds of nonagricultural employment? ii. What mechanisms may have underlain their influences?

Data Collection
This survey by IRRI covered all the households in the village. With the help of past records, they generated a list of households and their members who were 1. Residing in the village 2. Living outside of the village but still considered to be members of village households 3. Those who left the village and became selfsupporting. A method is used to calculate the strength of personal network.

Measurement of Personal Networks

It uses a list of positions salient in the context of research and asks if a respondent knows anybody at each position. If the respondent knows somebody at a certain position, she or he selects the most important person and we ask about the respondents closeness to that person. The closeness is measured by whether the respondent can ask a favor from that person. The respondents relationship is identified, with that person from the three types of relationships: family/relative, friend, or acquaintance. Therefore, the interview reveals, of the positions listed in the questionnaire, to which positions a respondent has connections through which type of relationships.

There are four broad categories of positions that people can be classified into:1) Politicians/Bureaucrats 2) Manager-level positions 3) Professional positions 4) Regular employee positions Using these four categories together with the information about the three types of relationship, we construct 12 variables that measure the size of personal networks in the nonagricultural sector . Each of these 12 variables can take a value from 0 to 4.

Descriptive Statistics

Table 3 in the following slide shows that agricultural laborers are the least (or the second least in a few cases) equipped individuals in terms not only of human capital (years of schooling) and physical capital (asset values) but also of the sizes of the personal networks over the nonagriculture sector. The table also shows that the levels of average years of schooling are not so different across occupations, except for technical/skilled work, implying that some other factors could affect occupational choice.

Regression
OLS regressions are done by keeping the four employment categories as dependant variables against the 12 personal network variables . In each of these models, the paper includes some residuals, and no significant coefficients of the residuals at any conventional levels are found.

Results
In order to start in a self-employment occupation, having networks of all kinds of relationships (i.e., family/relative, friend, and acquaintance) is important. In addition to education, having a family/relative network, particularly with those in regular employee positions, is important in increasing the chance to move to unskilled nonfarm work at small enterprises, and having a friend network with those in regular employee positions helps to obtain unskilled work at large enterprises. Third, having a tertiary-level education is crucial for acquiring technical/skilled work.

Personal Networks and the Terms of Employment

Hypothesis 1. In hiring unskilled workers at small enterprises, network premiums are realized most strongly among workers who obtained their jobs through family/relative networks, while network premiums are not realized in hiring unskilled workers at large enterprises. Hypothesis 2. Among workers from our study village who are employed in unskilled positions at small enterprises, those who are employed by the enterprises located near the village receive no significant difference in network premiums for the use of the family/relative network, whereas, among villagers working in distant enterprises, family/relative network users receive the premiums.

Descriptive Statistics
Table 5 reports the descriptive statistics by occupation and by channel to the current job. For the hypothesis testing, the study classifies the channels into four categories:

Family/Relative II. Friend III. Acquaintance IV. Advertisements (ads)/Employment agencies. Note that there is no individual who has entered into unskilled jobs at small enterprises through ads or employment agencies, while at large enterprises the four channels are used almost equally.
I.

The terms of employment look consistent with hypothesis 1 at small enterprises, where those who entered through the family/relative channel receive higher starting wage rates, stay longer in that occupation, and experience lower wage growth than those who entered through the other channels. At large enterprises, starting wages become higher when ads/agencies are used, which may imply that the magnitude of Bentolila et al.s (2004) discounted starting wage effect is larger than that of the network premiums at large enterprises. However, the differences are small.

The descriptive statistics for hypothesis 2 are shown in table 6. The locations are classified into four categories: 1. Local Community 2. Vicinity 3. Distant Major cities. 4. Metro Manila. Although the network premiums of family/relative channel users can also be detected in the local community, the differences between family/relative network and acquaintance channel users are not as large as in the vicinity.

Regression

For testing hypothesis 1 by means of regression analysis, the dependent variables we use are Log of starting daily wage rate Years in current job Wage growth rate (annual) Log of current daily wage rate. To control for different starting years, starting wage rate is converted into the real term with the wholesale price index.

Regression Results
A key finding is that those who used the friend or acquaintance channel started their work with significantly lower wage rates than those who used the family/relative channel. As hypothesized before, the gap in current wage between the friend network users and the family/relative network users becomes insignificant as the worker keeps working for more years. The gap in the wage rates between the family/relative and the acquaintance network also keeps decreasing. Another key finding is that years of schooling does not significantly determine the labor market outcomes, implying that, once one enters into this category of occupation, what is appreciated is not ability but the trustworthiness of the applicant that is assured through the family/relative network.

In regard with Table 8 where the sample is of unskilled workers at large enterprises First, the job channel dummies have no significant impact on any dependent variables. Second, in wage functions, years of schooling and its squared term become highly significant, with a conventional sign to each. Summarizing the results in tables 7 and 8, we conclude that hypothesis 1 holds.

Summary and Implications

Our regression results show that having the family/relative network, especially in regular employee positions in nonagricultural sectors, appreciably increases the probability of obtaining unskilled positions at small enterprises. We also find that, among those who participate in that occupation, the ones actually using the family/relative network channel are characterized by a higher starting wage. These findings imply that, especially in regular employee positions, the family/relative network has a referral function and thus its use results in the realization of network premiums in return for the resolution of asymmetric information problems.

Our regression results also imply that, even if the friend or the acquaintance network users start with lower wage rates, the disadvantages may not be so large in the long run because, among such users, workers who can prove to be trustworthy and thus who stay a long time with the enterprise can catch up to the wage level of the family/relative channel users.
Our results also show that the probability of obtaining unskilled positions at large enterprises increases slightly with the size of the friend network in regular employee positions reason being that the wage dynamics are determined by the number of years spent in school and experience. we conclude that labor market imperfections are resolved at large enterprises not mainly by personal networks but rather by other institutional and noninstitutional devices.

Our regression results show that the completion of tertiary-level education is crucial for the acquisition of skilled/technical jobs, whereas personal networks have little impact. Our analysis shows that the role of personal networks is changing along with economic and social modernization. The recent development of large-scale enterprises in the Philippines is widening the path for rural people to ascend to upper-income strata by improving their acquired attributes such as education. Such development is preparing a condition for achievement of more equal occupational opportunities.