The Remains of Informality in the Formal Sector: Social Networks and Wages in Senegal's Labor Market
AbstractWe develop a theoretical framework that considers the role played by moral hazard and the diversity of networks and cultures in the choice of hiring channel. Our model explains why either informal or formal hiring channels are preferred and either positive or negative wage differentials emerge for workers hired through informal channels, depending on circumstances. We show that, conditional on being employed, in favoritism contexts social networks are likely to be adopted as hiring channels for unskilled jobs and to result in wage penalties and the more so the stronger the ties, while otherwise the opposite happens. We then estimate an endogenous switching model for the case of Senegal's manufacturing formal sector and we find, consistently with our theoretical predictions in case of favoritism, that informal hiring channels are preferred to full unskilled vacancies and are associated with a wage penalty. Moreover, the probability of having been hired through a social network and the absolute value of wage penalties are increasing with the strength of ties.
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Bibliographic InfoPaper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 09-129.
Date of creation: Dec 2009
Date of revision:
social networks; hiring channel; wage differential;
Find related papers by JEL classification:
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-22 (All new papers)
- NEP-LAB-2010-05-22 (Labour Economics)
- NEP-SOC-2010-05-22 (Social Norms & Social Capital)
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