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Informal Referrals, Employment and Wages: Seeking Causal Directions

Author

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  • Ana Maria DIAZ E

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

Employers and job seekers rely extensively on job informational networks to fill vacancies or to find a job. The widespread use of job contacts to find work has been largely associated with labor outcomes, such as finding a job or even affecting wages. Some scholars have claimed that informal referrals play a determinant role in reducing informational mismatches between potential employers and job seekers. Although several studies have shown that the use of friends and relatives is correlated with labor outcomes, little is known about the causal effect. In this article, I aim to identify whether there is a causal effect of using informal referrals on two main outcomes: the probability of being employed and hourly wages. I use a large data set from Colombia, the Living Standard Survey 2003, to contrast the results from three main methodologies: standard OLS estimation, propensity-score matching, and instrumental variables. Results suggest that much of the positive effect of using informal referrals on employment reflects the prevalence of informal-sector jobs to be filled through this method rather than a causal effect. On the contrary, the results for hourly wages suggest a negative causal effect of using job informational networks, which is explained by the low-quality/poor matches theory. Yet, this is only true in formal-sector firms.

Suggested Citation

  • Ana Maria DIAZ E, 2009. "Informal Referrals, Employment and Wages: Seeking Causal Directions," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2009023, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2009023
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/2009023.pdf
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    Citations

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    Cited by:

    1. Catia Nicodemo & Gustavo Adolfo García, 2015. "Job Search Channels, Neighborhood Effects, and Wages Inequality in Developing Countries: The Colombian Case," The Developing Economies, Institute of Developing Economies, vol. 53(2), pages 75-99, June.
    2. Bilyk Olga & Sheron Iuliia, 2012. "Do informal networks matter in the Ukrainian labor market?," EERC Working Paper Series 12/11e, EERC Research Network, Russia and CIS.

    More about this item

    Keywords

    informal referrals; job search methods; employment rates; hourly wages; selec- tion bias; OLS; Propensity-Score Matching; Instrumental Variables; Roy Model;

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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