Informal Referrals, Employment and Wages: Seeking Causal Directions

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.