The Demand for Labor Market Information

Abstract

Government-run employment information services have been set up in an attempt to aid workers in the job seeking process. By providing information to workers, the government hopes to improve the match between supply and demand in the labor market [3]. However, recent research has shown that unemployed workers use direct search methods such as contacting friends, relatives or just firms more frequently than their use of labor market intermediaries. In addition, workers using these direct search methods generate better job offers than workers using indirect methods [12]. Such findings raise the question of why anyone would use a labor market intermediary instead of relying on friends, relatives or direct firm contacts. This paper attempts to answer this question by building and testing a model of the job seeker's demand for labor market information. The literature on job search has maintained that knowledge about particular firms' potential wage offers is valued by job seekers since it enables them to decide which firms to contact first [18; 22]. Our model of the demand for labor market information involves the weighing of this benefit against the time costs involved in seeking out labor market intermediaries. Unlike earlier work on the determinants of search strategies [12], the theoretical model we devise makes specific predictions about several factors that would affect one's use of labor market intermediaries: a lower discount rate, a lower initial stock of labor market information, greater coverage by unemployment insurance (UI), and higher variance of one's wage offer distribution all are expected to increase the use of intermediaries. These theoretical predictions are tested on the 1981 wave of the National Longitudinal Surveys (NLS) youth cohort aged 14-21 in 1979. We find support for most of these hypotheses, particularly for the impact of UI, information stock and wage offer variance. The effect of UI suggests that this government program subsidizes the collection of labor market information, which, as suggested, is an essential component of efficient labor market adjustment. If the privatelygenerated quantity of information is suboptimal, due possibly to risk aversion on the part of