Are Small Firms Labor Constrained? Experimental Evidence from Ghana

Small firms in developing countries are typically modeled as facing a frictionless market for workers, characterized by low search costs, full information, and a lack of regulation. We report the results of a field experiment that randomly placed unemployed young people as apprentices with small firms in Ghana. The program provided a novel worker screening technology to firms (in addition to simply reducing search costs), as (voluntary) participation included non-monetary costs for unemployed young people applying to the program. We find that firms that were offered apprentices by the program hired and retained them for at least six months (the end of our study window). Secondly, each assigned apprentice is associated with monthly increases of approximately 25 USD in revenue and 10 USD in profits (about 7-10% of baseline). Together, these findings suggest the presence of economically significant search costs in our context. Moreover, we present strong suggestive evidence of substantial heterogeneity in these returns as a function of (unobserved) worker ability. This final result highlights the importance of screening in firms' hiring decisions, and echoes the widespread use of an entry fee mechanism to hire apprentices in our baseline labor market. A simple model in which productivity differences associated with worker ability necessitate costly screening can predict the impacts of our program. Our findings have implications for understanding labor markets in low-income countries, and in particular suggest that high youth unemployment in developing economies could be the result, at least in part, of substantial labor market frictions