Job search channels, neighborhood effects and wages inequality in developing countries: The Colombian case

This paper analyses the relationship between social networks and the job search behaviour of individuals. Networking is not only based on friends and relatives but also on neighbourhood. The geographic closeness is associated to social interactions. Individuals who are in physical and social proximity share the same sources of information, because they divide individual characteristics or because they learn from one another's behaviour. Using data from Colombia in 2009 we explore how neighbourhoods have an effect on the channel used to search for a job (formal vs informal). People tend to opt for a formal or informal channel depending on the channel selected by employed people in their neighbourhood. In addition, we study the wage premium in using a formal or informal channel, exploring the inequality that can arise using a different job search method. Our results show that the neighbourhood affects the individual's job search method and referral workers earn less wage at the bottom of the wage distribution with respect to non-referred workers. At the top of the wage distribution the difference observed is due to different characteristics between the two groups. Colombia presents persistent high levels of informality and inequality. These features impose important social and economic costs such as low tax collection, low employee protection and deficiencies in the labour intermediation process with strong informational asymmetries in the job search. New policies to regulate the labour market are need.