Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/126666 
Authors: 
Year of Publication: 
2015
Series/Report no.: 
IZA Discussion Papers No. 9573
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
Estimates on the effect of job contact method – i.e., informal versus formal search – on wage offers vary considerably across studies, with some of them finding a positive correlation between getting help from informal connections and obtaining high-paying jobs, while others finding a negative one. In this paper, I theoretically investigate the sources of discrepancies in these empirical results. Using a formal job search framework, I derive an equilibrium wage distribution which reveals that the informal search yields for some groups higher and for some others lower wages than formal search. The key result is the existence of nonmonotonicities in wage offers. Two potential sources of these nonmonotonicities exist: (i) peer effects and (ii) unobserved worker heterogeneity in terms of the inherent cost of maintaining connections within a productive informal network. The model predicts that a greater degree of unobserved heterogeneity tilts the estimates toward producing a positive correlation between informal search and higher wages, whereas stronger peer influences tend to yield a negative correlation. This conclusion informs the empirical research in the sense that identification of the true correlation between job contact methods and wage offers requires a careful assessment of the unobserved heterogeneity and peer influences in the relevant sample.
Subjects: 
heterogeneity
peer effects
informal networks
job search
nonmonotonicities
JEL: 
D85
J31
J64
Document Type: 
Working Paper

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