Abstract
We 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 even more, 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 fill 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.
Highlights
1 Introduction Why are some workers hired through social networks, while other employees through formal channels, and what is the effect of the hiring channel on their wages? In this paper we theoretically explore the circumstances in which either informal1 or formal hiring channels are preferred and either positive or negative wage differentials emerge, considering the role played by moral hazard and the diversity of networks and cultures in the choice of hiring channel
5 Conclusions This paper sheds light on the role played by social networks as hiring channel and on wage differentials between employees hired through formal and informal hiring channels
It contributes to the theoretical literature on informal hiring channels and to the empirical literature on social networks as hiring channels in developing countries
Summary
Why are some workers hired through social networks, while other employees through formal channels, and what is the effect of the hiring channel on their wages? In this paper we theoretically explore the circumstances in which either informal or formal hiring channels are preferred and either positive or negative wage differentials emerge, considering the role played by moral hazard and the diversity of networks and cultures in the choice of hiring channel. To our knowledge the only existing analysis of informal hiring channels concerning Sub-Saharan Africa refers to the colonial period (Fafchamps-and-Moradi (2009)) This region is pervaded with informality to a greater extent than other developing countries and social networks play a crucial role in their labor markets. The percentage falls to 60% for skilled blue collars and to 41% for skilled white collars and managers.24 Workers who found their job through informal contacts are less educated, less experienced, and younger than employees hired on the formal labor market. Since adverse selection has long been investigated in the context of the hiring channel choice without managing to account for empirical evidence, we abstract from it for the sake of tractability and we focus instead on other crucial characteristics of the phenomenon that received little attention until now, like the role played by moral hazard and network characteristics. We simultaneously take into account the choices of employers and applicants
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