Informal networks are an important source of information in the labour market, especially in regard to job search. Literature has distinguished two different search channels: formal and informal. Formal channels are defined as the search by newspaper advertisements, internet, public employment offices, etc., while informal refers to the search via friends and relatives. Empirical evidence has showed that about half of all jobs are found through informal networks (Holzer, 1988; Franzen and Hangartner, 2006; Ioannides and Datcher Loury, 2004).

In “Job Search Channels, Neighbourhood Effects and Wages Inequality in Developing Countries: The Colombian Case” we analyse the relationship between social networks and the job search behaviour. In particular, we explore the geographic closeness such as the social interactions to explain the job search. Individuals who are in physical and social proximity share the same sources of information because they share individual characteristics or because they learn from one another's behaviour. So, networking is not only based on friends and relatives, but also on the neighbourhood.

Using data from Colombia in 2009 we calculate how neighbourhoods have an effect on the channel used to search for a job (informal vs formal). 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 wage inequality that can arise using a different job search method. Colombia represents an ideal case to analyze the job search behaviour of individuals. It is a medium-income nation characterised by a moderate but stable economic growth accompanied by high levels of poverty, inequality and violence (Royuela and García, 2013). As in other developing countries, the labour market of 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 job search.

The first evidence among job networks and neighbourhoods can be found in Figure 1, where we report nodes at city block level for Bogota city, and distinguish between residents that have found previous jobs through formal and informal channels in two different years (2006 and 2009). As we can see, workers that use formal channels are very close to each other and their number increases across years in the neighbourhood where other workers have previously used the same channel.
 

Figure 1. Location of workers at city block level for Bogotá distinguishing between job search channels

The results of this study confirm the theory that proximity is a social interaction and has an influence on job search methods. We find that the search channel is influenced by the way that neighbours found their current employment. Individuals that live close to others (same block) and find a job by an informal network have more probability to use the same channel. Moreover, informal channels are more used by workers who find low occupations and in small firms. Big firms prefer to hire by no referral.

We also test the presence or not of a wage premium for workers referred and not. Based on an analysis of the quantile decomposition of the wage gap across people who have used a formal or an informal channel, we find a significantly positive effect of the channel on the wage distribution (see Figure 2). Inequality increases across people that use informal channels, especially at the bottom of the wage distribution. These wage differences by channel used to find a job are due to unobservable effects, such as poor matching or segregation in some kind of jobs, while at the top of the wage distribution the difference between the two groups is due to the different characteristics among them. From a policy point of view, to avoid this inequality, the Colombian Government needs to take more actions to keep away spatial segregation across people.

Figure 2. Quantile Decomposition
Formal vs Informal

References
Franzen, A., and D. Hangartner (2006). “Social Networks and Labour Market Outcomes: The Non-Monetary Bene_ts of Social Capital”, European Sociological Review, 22(4): 353-368.

Holzer, H. (1988). “Job Search Methods Used by Unemployed Youth”, Journal of Labor Economics, 1(6): 120.

Ioannides, Y. M., and L. Datcher Loury (2004). “Job Information Networks, Neighborhood Effects, and Inequality”, Journal of Economic Literature, 42(4): 1056-1093.

Royuela, V. and G. García (2013). “Economic and Social Convergence in Colombia”, Regional Studies, http://dx.doi.org/10.1080/00343404.2012.762086.