Do Friends and Relatives Really Help in Getting a Good Job?

Abstract

The available empirical evidence on the wage effect of finding jobs through informal contacts is mixed. This author theorizes that, depending upon the efficiency of formal search methods, the use of personal contacts can lead either to a wage premium or to a wage penalty. Using data from the European Community Household Panel (ECHP), the author finds new evidence to suggest that across many of the countries in the European Union, premiums and penalties to finding jobs through personal contacts are equally frequent and are of about the same size. Such cross-country variation seems to reflect differences in the efficiency of formal search channels. In particular, the wage effect of finding jobs through personal contacts is higher in countries with more labor market intermediaries. Differences-in-differences estimates based on the Italian liberalization of the labor recruitment industry confirm this result.