Matching to First Jobs – Informal hiring channels are more important in the job matching process during recessions than in booms

A large and active empirical literature has asserted that informal hiring channels can provide firms with information about worker qualities. Informal hiring channels mitigate the inherent uncertainty faced by recruiting firms and thus reduce firm-level hiring costs. But the existence of informal hiring channels may also dampen aggregate labor market fluctuations if recessions provide firms with better opportunities to use informal hiring channels, as suggested by the Fujita and Moscarini analysis of recall hires across the cycle. This may be particularly important for labor market entrants since information problems are more severe for these groups, and since entrants’ labor market prospects tend to be particularly sensitive to business cycle fluctuations. In this pa­per we present systematic evidence on the use of informal hires in the process where young workers are matched to their first post-graduation jobs using data that spans a 25-year period covering both booms and great recessions.

Using Swedish economy-wide data spanning across two deep recessions, we examine the relationship between labor market conditions and the role of social contacts in matching labor market entrants to employing firms. We use class-plant fixed-effects models to isolate the role of social contacts from paid work during high-school. One third of post-graduation matches are formed at establishments where youths worked during their studies. Furthermore, graduates are much more likely to match with sites to which adult coworkers from these jobs have relocated. These patterns are strikingly counter-cyclical. Contacts are much more important for job matching in deep recessions than in good times, suggesting that informal contacts and social networks are crucial determinants of matching patterns in bad times.

Our results show that informal hiring channels are more important in the job matching process during recessions than in booms. The predictive power of both direct and indirect links are much stronger in bad times than in good times. The effect size is twice as large in bad times as in good times. This result holds across all segments of the market and across both genders. It is robust to accounting for time trends (and quadratics), to accounting for important characteristics of the entrant, to allowing for delayed market entry, to models that account for business cycle conditions when the links where formed, and to using local rather than aggregate labor market conditions with and without time dummies. Transitions into other establishments within the linked establishment’s firm or towards establishments where workers who left just before the summer jobs started are if anything pro-cyclical instead. Thus, we conclude that the countercyclical patterns we document are large in magnitude, general in nature, and robust to large alterations of the statistical model. We also document that part of the effects are driven by demand-side selection. Summer jobs offers during recessions are more likely to come from firms that rely on informal hire regardless of business cycle conditions.

Overall, our results are consistent with a view that informal hires are preferred from a firm perspective because of lower screening costs and better information about worker or match quality. Thus, the ties are used more prevalently when tightness is low and connected workers therefore have worse outside options.

Chosen excerpts by Job Market Monitor. Read the whole story at Connecting the young: high school graduates’ matching to first jobs in booms and great recessions – IFAU