A Moral Hazard Approach to Wage Discounts under Informal Hiring
| Author | Miguel A. Duran,Antonio J. Morales |
| DOI | http://doi.org/10.1111/sjpe.12037 |
| Published date | 01 May 2014 |
| Date | 01 May 2014 |
A MORAL HAZARD APPROACH TO
WAGE DISCOUNTS UNDER INFORMAL
HIRING
Miguel A. Duran* and Antonio J. Morales*
ABSTRACT
This study discusses informal hiring in terms of a standard principal–agent
model. We have developed an adverse selection model of the labour market
where effort is not contractible and employers have the opportunity to use infor-
mal search channels for hiring purposes. This standard framework enables us to
provide an effort-based explanation of the wage gap associated with informal
hiring. Besides the wage discount, another feature of the equilibrium is that low-
ability workers informally hired shirk.
II
NTRODUCTION
Informal hiring is a widespread phenomenon. A large number of studies point
out that the use of friends, relatives and acquaintances to search for jobs
accounts for about 50% of hiring in the United States and Europe –although
with considerable differences depending on the sample used [see Ioannides and
Loury (2004) for a review]. This helps to explain the considerable amount of
research focused on how informal recruitment affects the labour market.
According to Ioannides and Loury (2004), a stylized fact drawn from the
empirical part of this research is that informal hiring is generally productive,
i.e. it increases the amount of job offers received and accepted, reduces the
probability of quitting and increases job tenure. Nevertheless, the estimated
effect of informal recruitment on wages is heterogeneous. The range of results
goes from finding a positive correlation between wage levels and informal hir-
ing to observing a negative, changing or non-significant relationship.
A wage premium associated with informal job search is found by Rosen-
baum et al. (1999) and Kugler (2003), who use the US databases High School
and Beyond and the National Longitudinal Survey of Youth respectively.
Similarly, for Dartmouth College students, Marmaros and Sacerdote (2002)
conclude that networking increases the probability of obtaining a high paying
job. A changing relationship between wage levels and informal recruitment is
found by Simon and Warner (1992). Using US data from the Survey of
*Universidad de M
alaga
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12037, Vol. 61, No. 2, May 2014
©2014 Scottish Economic Society.
119
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