Place of Work and Place of Residence: Informal Hiring Networks and Labor Market Outcomes



Job Information Networks and Social Interactions within Neighborhoods. A wide
array of studies have documented the relationship between the neighborhood environment and
employment outcomes. Some important examples include Ihlanfeldt and Sjoquist (1990) who
find that youth residing far from suburban areas where low skill jobs tend to be located had worse
employment outcomes, Case and Katz (1991) who find a correlation between youth idleness and
the idleness of neighbors, O’Regan and Quigley (1998) who find that youth are more likely to be
high school dropouts and unemployed when they reside in high poverty neighborhoods, and
Weinberg, Reagan and Yankow (2004) who find that people who move to neighborhoods with
worse attributes have worse employment outcomes.

Many scholars have suggested job market referrals or information networks as an
important factor behind such neighborhood effects.9 Rees and Schultz (1970), Corcoran et al.
(1980), Holzer (1988), Blau and Robbins (1990), Blau (1992), Granovetter (1995), Addison and
Portugal (2001) and Wahba and Zenou (2003) all document the importance of referrals and other
informal hiring channels in the labor market, using both U.S. and non-U.S. data. A number of
these studies including Holzer (1988) and Blau and Robbins (1990) find that informal referrals
are more productive than more formal methods in terms of job offer and acceptance probabilities.
Additional studies including Datcher (1983), Devine and Kiefer (1991), Marmaros and Sacerdote
(2002), and Loury (2004) find evidence that use of informal networks increases the quality of the
match as captured by job tenure or earnings.10

Moreover, considerable evidence exists to suggest that the use of and impact of job
information networks varies across demographic groups. According to Ioannides and Loury, the
evidence on usage differences is mixed in general, but suggests that women and workers with
higher education levels are less likely to use informal job networks. In terms of relative
productivity, Bortnick and Ports (1992) found that these networks were slightly less productive
for women as compared to men. Holzer (1987), Bortnick and Ports (1992), and Korenman and
Turner (1996) found that such networks were substantially less productive for African-

9 The use of informal channels such as referrals by employers can be rationalized as a means to reduce the
uncertainty regarding the quality of a prospective employee. Montgomery (1991) was the first to formally
model a labor market in which both formal and informal hiring channels coexist. Focusing more closely on
the information exchange among workers, Calvo-Armengol and Jackson (2002) analyze an explicit
network model of job search in which agents receive random offers and decide whether to use them
themselves or pass them on to their unemployed contacts depending on their own employment status and
current wage.

10 See Elliot (1999) and Loury (2003) for counter examples where the use of informal networks led to lower
wages. Of course, the lower wages may be associated with increased match quality on desirable job
attributes causing the individual to accept a lower wage as a compensating differential.



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