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Do friends and relatives really help in getting a good job?

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  • Michele Pellizzari

Abstract

Informal contacts are extensively used by both firms and workers to find jobs and fill vacancies. The common wisdom in the economic literature is that jobs created through this channel are of better quality and pay higher wages than jobs created through formal methods. This paper explores the empirical evidence for European countries using the European Community Household Panel (ECHP) and discovers a large cross-country as well as cross-industry variation in the wage differentials between jobs found through informal and formal methods. Across countries and industries wage premiums and wage penalties to finding jobs through personal contacts are equally frequent. This paper argues that such variation can be explained by looking at firms' recruitment strategies. In labour markets where employers invest largely in formal recruitment activities, matches created through this channel are likely to be of average better quality than those created through informal networks. A simple theoretical model is used to show that employers invest more in recruitment for high productivity jobs and for positions that require considerable training. The empirical predictions of the theory are successfully tested using industry-level data on recruitment costs.

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File URL: http://eprints.lse.ac.uk/19980/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19980.

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Length: 59 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:ehl:lserod:19980

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Keywords: Social Networks; Wage Differentials; Recruitment; Hiring;

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References

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  1. Pierre Cahuc & Fran�Ois Fontaine, 2009. "On the Efficiency of Job Search with Social Networks," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(3), pages 411-439, 06.
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  8. Lindeboom, M. & Ours, J.C. & Renes, G., 1991. "Matching employers and workers : an empirical analysis on the effectiveness of search," Serie Research Memoranda 0063, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  9. Calvó-Armengol, Antoni & Zenou, Yves, 2001. "Job Matching, Social Network and Word-of-Mouth Communication," CEPR Discussion Papers 2797, C.E.P.R. Discussion Papers.
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  18. Mortensen, D. T. & Vishwanath, T., 1995. "Personal contacts and earnings: It is who you know!," Labour Economics, Elsevier, vol. 2(1), pages 103-104, March.
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  22. Franco Peracchi, 2002. "The European Community Household Panel: A review," Empirical Economics, Springer, vol. 27(1), pages 63-90.
  23. Saloner, Garth, 1985. "Old Boy Networks as Screening Mechanisms," Journal of Labor Economics, University of Chicago Press, vol. 3(3), pages 255-67, July.
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  25. Adriana D. Kugler, 1997. "Employee referrals and the inter-industry wage structure," Economics Working Papers 252, Department of Economics and Business, Universitat Pompeu Fabra.
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