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The Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency. Mismatch in the Low-Wage Labor Market: Job Search Perspective

Publication Date
Nov 30, 1999

by Julia R. Henly



Increasing attention has been paid to the question of whether and to what extent the employment difficulties facing disadvantaged workers are exacerbated by problems of spatial, skills, and informational "mismatches." It has been suggested, for example, that the ability of less-skilled workers to adapt to structural changes in the labor market might be affected by aspects of geographic space and racial segregation within that space (i.e., disadvantaged workers may not reside where firms seeking workers are located), and/or by human capital considerations (i.e., the skills of disadvantaged workers may not match the needs of employers). Moreover, job seekers may have inaccurate or insufficient knowledge about potential job prospects, and employers may face these same informational deficits regarding job seekers.

Several economic changes negatively affecting disadvantaged workers have given rise to this set of questions about mismatch. Industrial and technological changes have increased the demand for workers with more than a high school degree across industrial sectors and have shifted the demand for less-skilled workers from higher-wage manufacturing industries to lower-wage service and retail jobs.(1)  There has been a corresponding increase in the use of temporary and part-time workers and a decrease in unionization, which have further contributed to the lower earnings of the least skilled.(2)  Moreover, there has been an outmigration of low-skilled jobs — in manufacturing, retail, and service — from central cities; however, the residential trends of disadvantaged central city residents have not mirrored these locational employment shifts.(3)

Other research in this volume addresses the first two questions of spatial and skills mismatches, whereas this chapter attends to the third — the informational side of the mismatch question. In particular, this chapter will explore one aspect of informational access — the issue of job search and recruitment. Job search strategies are an important mechanism by which job seekers and employers acquire information about one another. The type of method employed will ultimately direct the job search and have implications for the kind and quality of information acquired. If employers and job seekers are relying on different search methods, or if particular search methods benefit some job seekers more than others, the quality of job matching may be affected.

As Holzer's chapter in this volume suggests, some problems of information may be a consequence of spatial mismatch. For example, central city residents residing in job-poor areas may be less aware of job openings far from their home, and employers may use search strategies that make it difficult for them to gain such knowledge. Given that information about job openings is transmitted largely through the social networks of friends and relatives (a finding discussed in much greater depth later in this chapter), the social networks of spatially isolated individuals, assuming that they too are neighborhood-based, will be poor purveyors of information about employment opportunities outside of the central city. Although insufficient or inadequate information about job opportunities can be a consequence of spatial mismatch, information problems will not be resolved solely by addressing spatial barriers to employment.(4)  That is, geography may shape the information available to employers and job seekers, but spatial constraints are unlikely to entirely define how searches are carried out.

The goal of this chapter is to ascertain from the existing job search literature whether there are informational barriers to employment that arise from a mismatch between employer and job seeker search strategies and for whom this informational mismatch may be most serious. The focus on informational mismatch should not be interpreted as a discounting of other important contributing factors to the employment problems of disadvantaged workers. In fact, it is important to keep in mind that although the attention herein is on informational barriers, human capital factors and macro-level indicators of economic activity each explain a much greater proportion of the variance in employment rates, as compared to either spatial or informational considerations.(5)

Types of Job Search Strategies

Employers recruit workers and individuals seek jobs using a variety of methods. Job search methods are often categorized as either formal or informal. Formalized search can operate via media advertisements and help-wanted signs, or can take place in any number of public or private intermediary organizations (e.g., union halls, schools, employment agencies, and special job search and placement programs run through welfare offices, community organizations, and private agencies). Whereas some of these intermediary organizations screen and refer candidates to firms, others provide job search training with or without referrals. Still others serve primarily as clearinghouses and phone-banks — passing information to job seekers and providing the means for them to answer advertisements or place cold calls to businesses (which may or may not have positions available). Intermediaries vary as well in the extent to which they are developed to serve employer versus job seeker needs. Employers and job searchers who rely on informal methods, on the other hand, act on information from personal intermediaries, such as friends or acquaintances, neighbors, relatives, or current employees of a firm. When taking advantage of informal recruitment, employers typically encourage their current employees to refer potential applicants for positions, and job seekers turn to individuals in their social networks for information regarding job openings.

In addition to these formal and informal strategies, job seekers frequently approach firms directly without the help of a formal or informal go-between. For example, a job seeker might send an unsolicited application to a firm or walk into an establishment with no prior information about job availability or skill requirements. Direct applications and walk-ins are sometimes considered types of informal methods,(6) but they are treated as distinct here because neither direct applications nor walk-ins allow any pre-screening of candidates or jobs. Finally, in some cases, no active search is carried out at all. In fact a relatively large number of jobs are filled by non-searchers and non-recruiting employers.(7)  Although an under-studied phenomenon, the available data suggest that falling into a job without an active search occurs both for individuals previously outside of the labor force, as well as for employed individuals who move into new jobs.

Neither job seekers nor employers limit their searches exclusively to one of the above strategies. During periods of high unemployment, job seekers reportedly increase the number of search methods they use(8) whereas during labor shortages employers may accelerate their recruitment efforts by employing multiple search strategies, even those that would be otherwise less preferred.(9)  In particular, search via formal organizations is often viewed as a last resort strategy by both sides, and is used by job seekers primarily when jobs are scarce and by employers during tight labor markets.(10)

Effectiveness of Job Search Strategies for Finding Employment

Several studies have attempted to determine whether there is a relationship between the type of search method used and the outcome of the job search process. This literature has grown over the last 20 years to include studies of job seekers and employers; it consists of studies that examine large representative samples spanning several industrial and occupational sectors, as well as studies that provide a more contextualized and detailed examination of the job search process utilizing smaller-scale, often qualitative data sets.

Despite the growth of the job search literature, sampling limitations and measurement problems make it difficult to draw firm conclusions about the extent to which there is a causal relationship between search method and employment outcomes. The manner in which outcomes are measured varies, with studies typically defining the effectiveness of job search strategies in terms of (1) the frequency with which different job search methods are used for the subset of hires that are successful; (2) the perceived importance and perceived effectiveness of different search methods to the hiring process; or less often (3) the offer-to-application ratio based on the job search method used by job applicants.(11)  Some studies have also examined the relationship between search method and measures of job quality, such as turnover, productivity, and wages. Because most studies rely on nonexperimental, cross-sectional, retrospective data, may selectively examine only successful job searches, and may include data about job searches without information about actual job availability, we are limited in our ability to interpret significant associations that have been found between search method and outcome. Although most of the quantitative studies do incorporate statistical controls into the analyses, it generally remains unclear whether the search method per se (rather than some unmeasured characteristic of the job seeker, the firm, or the broader labor market context) is affecting the job search outcome.(12)

Despite methodological differences, a review of this literature does demonstrate a consistent pattern of results. Although employers and employees make use of multiple methods of job search, informal referrals are the most popular and seemingly most effective method of job search for job seekers and employers in the low-wage labor market. Advertisements and direct applications are frequently utilized but less often successful search methods, and formal organizations are used less and seem to be the least successful relative to the other methods. There is some variation by industrial and occupational characteristics and by the individual characteristics of the job seeker to this general pattern of findings. The findings from this literature are summarized below.

The Effectiveness of Informal Search Strategies

  • Across a variety of industrial and occupational sectors, informal referrals are the most frequent and most effective job search method used in the low-wage labor market.

The most consistent finding in the job search literature, from both the employer and worker sides, is the importance of informal networks to the job-matching process. Both the early job search studies and several more recent investigations suggest that reliance on information gained from informal network members is an extremely common and effective job search strategy. Depending on the study, informal referrals are typically estimated to account for somewhere between 25 to 60 percent of hires.

The prominence of informal referrals is underscored both by studies of job seekers and employers. Job seekers who utilize informal referrals have a greater probability of getting an offer as compared to seekers who utilize other methods.(13)  Moreover, informal referrals are most often mentioned as the type of method used to acquire one's job, in numerous studies of employees.(14)

Consistent with the findings for job seekers, employer studies also indicate that employers put considerable trust in the value of referrals. Across studies, employers report that somewhere between one-third and one-half of target jobs are filled either by a current employee referral or by referrals from acquaintances of the employer. For example, Holzer (1996) in his analysis of a survey of 800 employers in Atlanta, Boston, Detroit, and Los Angeles, representing a variety of industries, finds that slightly more than one-fourth of the employers hired their last noncollege-educated employee through a referral from a current employee, and an additional 12 to 14 percent were filled through referrals provided by a personal acquaintance of the employer. Several qualitative interview studies with urban employers suggest even greater employer reliance on informal referrals. (15)

Overall, these studies suggest that the use of informal referrals is relatively common across industrial sectors, occupational categories, and occupational statuses, but seem to be used disproportionately for entry-level jobs, jobs that do not require a college education, blue-collar jobs, and for low-skilled/low-wage occupational sectors with ethnically homogenous workforces. Small employers may be particularly likely to hire via informal network connections.

  • The informal referral process operates largely through closely knit, ethnically homogenous social networks. As a result, informal referrals facilitate the employment of individuals within the network base of a firm's current workforce, while excluding individuals not linked to these network structures.

The importance of informal network referrals to the hiring process suggests, of course, that job seekers with fewer connections to employed individuals — those least likely to receive inside information about jobs and least likely to be recommended by current employees to their employers — will be at a disadvantage in the job-finding process. In other words, an informal hiring system facilitates the employment of individuals who are already part of the network base of the current workforce, at the exclusion of others who may be more weakly attached to it. This exclusionary aspect of an informal search strategy is exemplified in the case of many employers of disadvantaged workers whose ethnically homogenous workforces are maintained and supported by the practice of recruiting new employees almost entirely via employee referrals. Because these referrals are drawn primarily from closely knit and ethnically homogenous social networks, it becomes very difficult for prospective job seekers with weaker network connections to penetrate the system. Such a system also narrows the labor market opportunities of the nonexcluded group to a limited set of segregated occupational "niches." Research suggests that low-skilled Latino/a and Asian immigrant workers may have particularly effective closely knit job networks, and these networks may operate at the expense of African Americans who might otherwise find employment in these firms.(16)  In fact, because firms that rely primarily on internal employee referrals tend to have segregated Latino/a or Asian workforces, the exclusionary aspects of informal search most negatively affect African American job seekers whose social networks are disproportionately made up of other low-skilled blacks.(17)

The Effectiveness of Other Search Strategies

  • Compared to informal referrals, reliance on direct applications is a less-effective method of job search. A direct application is more likely to be successful for white applicants, and in retail, sales, and service occupations and large, public-sector firms.

Analyses of the Current Population Survey (CPS) data suggest that unsolicited direct applications represent the most common method of job search among the unemployed, and the use of direct applications tends to increase during periods of high unemployment.(18)  However, despite their greater use, direct applications are less likely than informal referrals to successfully lead to a job offer or hire. Both studies of workers(19) and studies of employers(20) suggest that somewhere between 10 to 25 percent of jobs in the low-wage labor market are actually filled by unsolicited applications. African Americans are less likely than whites to receive offers as the result of a direct application, and the black-white gap in offer rates has been found to be higher for direct applications than for any other search method.(21)

Whereas direct applications do not appear to be the primary search method in any industrial or occupational sector, their use is apparently more common among employers in retail sales and service.(22)  Direct applications are also used more often by large firms than small firms(23) and by the public sector as opposed to the private sector.(24)  Importantly, African Americans who rely on direct applications in their job searches continue to be at a disadvantage relative to white direct applicants even in sectors with proportionately higher black employment (i.e., the public sector).

  • Advertisements account for about as many hires as direct applications and, like direct applications, seem to function to the disadvantage of nonwhite applicants. Advertisements are more commonly used by suburban employers and to hire clerical and entry-level managerial and professional workers in the private sector.

Most studies suggest that, although employers have increased their use of advertisements in the last 20 years,(25) fewer than 10 percent of jobs obtained by less-educated workers are the result of successful responses to media advertisements.(26)  Employer studies suggest the number is somewhat higher, accounting for about 25 percent of less-skilled hires.(27)  Although the racial gap does not appear as large as for direct applications, research findings suggest that African Americans who rely on advertisements are still significantly less likely than their white counterparts to receive offers.(28)  Advertisements seem to be used more often by private- rather than public-sector employers,(29) and by suburban firms and firms seeking clerical and entry-level managerial and professional workers.(30)

Data are less consistently collected on the use and effectiveness of help-wanted signs; however, there is little evidence that this method is particularly desirable or effective — either for employers or job seekers.(31)  Qualitative evidence suggests that central-city employers, in particular, are skeptical of posting help-wanted signs for fear that doing so would attract a flood of "undesirable" applications from local residents, which could be avoided through more targeted strategies such as informal referrals.(32)

  • Formal organizations are generally the least preferred method of job search by both job seekers and employers, and public and private agencies together account for 10 percent or less of less-skilled hires. Although search via formal organizations accounts for a minority of job matches, it is a relatively more successful strategy for African Americans when compared to their success using other methods. Formal organizations are disproportionately used by large, bureaucratic firms with substantial hiring needs.

Data from several firm-level employer studies are remarkably consistent concerning the low percentage of hires obtained through public or private agencies.(33)  These studies suggest that public employment agencies, which tend to be used disproportionately by unemployed and African American job seekers, account for less than 4 percent of less-skilled hires.(34)  Private employment agencies have been found to account for a slightly higher percentage of less-skilled hires, and are disproportionately utilized to fill clerical positions. Overall, employment agencies (public or private) are used more frequently by larger, more bureaucratized firms with formalized personnel offices and especially by financial institutions.(35)

Although the use of formal agencies for job searches is relatively rare across industrial sectors, there is some evidence that when such a search method is used by an employer, African Americans benefit.(36)  The formalized and less-subjective screening process that occurs in employment agencies as compared to the other methods undoubtedly lessens the influence of negative beliefs based on group-level stereotypes, resulting in a fairer evaluation of job candidates. The problem, of course, is that these same formalized procedures are looked on unfavorably by many employers, who in fact prefer to have the opportunity to exercise more subjective decisionmaking. Thus, whereas formal organizations may hold benefits for African American job seekers, the promise of these organizations remains limited because most employers prefer other hiring methods.

The Impact of Search Method on Turnover, Worker Productivity, and Earnings

It is also important to know whether the search strategy has an impact on other employment outcomes such as turnover, productivity, and earnings. As discussed below, the evidence regarding this question is quite mixed.

  • Job turnover may be lower and perceived productivity, higher for jobs gained through informal referrals; however, there is no consistent relationship between type of search method used and earnings.(37)

Both quantitative and qualitative studies consistently find that turnover is lower for jobs found through informal recruitment channels as compared to advertisements, public and private employment agency referrals, or walk-ins.(38)  Although the effect of search method on actual productivity is unknown, there is evidence that, net of individual-level and firm-level characteristics, employers judge the productivity of workers more positively when they have been referred through an informal contact, rather than via either a public or private employment agency.(39)

Informal recruitment may represent an effort by employers to regulate worker conduct and facilitate on-the-job training, thereby improving worker productivity and reducing turnover.(40)  Specifically, it has been argued that working side by side with one's family members and friends on the job facilitates the transmission of normative work rules and increases the pressures on employees to successfully meet workplace expectations. Whereas some employers express concern about coworkers being "too close," especially in sales positions and positions that deal with the transfer of money, these concerns apparently do not outweigh the benefits that informal referrals represent to most employers.(41)

The relationship between search method and earnings is less clear. Findings that suggest initial wage gains for workers who found their jobs via informal contacts rather than formal means(42) are dampened by studies suggesting these gains are short-lived for most respondents(43) and by other studies that show no impact on wages,(44) or even negative wage effects.(45)  Holzer (1996) finds, for example, that, net of other effects, firms whose last noncollege hire was recruited through a current employee (as well as through direct application) actually paid less than those recruited via private employment agencies and union referrals.(46)  Moreover, to the extent that informal job search does hold a relative wage advantage over other methods, the advantages apparently hold only for whites.(47)

  • The mixed results regarding earnings might be explained by differences in the social capital of networks. Social networks with higher-status members may provide ties to higher-quality jobs, and vice versa.

Whether informal referrals lead to better quality jobs (e.g., higher earnings) may be dependent on the status characteristics of the referring individuals within a job seeker's network. Unemployed or low-wage job seekers who are embedded in closely knit, homogenous networks of other unemployed or marginally employed persons may not reap wage benefits by relying on informal search methods, because their social contacts share a limited amount of job information and this information is likely to concern a narrow range of low-wage job openings. In contrast, reliance on a more heterogeneous network of individuals who vary in status as well as connections might expand an individual's knowledge about job opportunities, more significantly than is possible within the shared milieus of close family and friends, and result in a more diverse set of referrals and ultimately better quality jobs.(48)  Such an explanation helps to explain the apparent differential effects of informal referrals by race and ethnicity. For example, minority job seekers who successfully rely on white referrals, especially white male referrals, have been found to receive higher wages than those whose referrals share similar individual characteristics to themselves.(49)  Thus, it would appear that the question of whether an informal referral leads to a better job is dependent on characteristics of the referring source and his or her relationship to the labor market.

Why Are Informal Referrals So Important?

  • Informal network referrals represent an inexpensive and efficient method of job search.

There are many factors that might help explain the preference for particular job search methods over others. For example, search methods vary in the costs and time investments that they demand, as well as in the applicant pools that they draw. Thus, promising search strategies might be viewed as those that produce a good pool of job candidates with limited expenditure of time or effort on the part of the employer. Especially for jobs that do not demand a college education, employers prefer inexpensive search strategies that demand little of their time.(50)

An informal referral strategy is an inexpensive and efficient method of job search. Although some of the other methods are equally inexpensive on the front end, employers who rely on referrals can exert control over the size of the applicant pool (by limiting the number of referrals they accept and requesting referrals from a select group of their best workers), thereby increasing the efficiency of the search and selection process. Other inexpensive search methods like direct applications and help-wanted signs and more expensive approaches like media advertisements are all likely to produce much larger applicant pools (especially during periods of high unemployment), the sorting through of which may ultimately prove to be a significant time investment for employers.

  • Informal referrals also serve an important applicant screening function, which employers believe improves the quality of job applicants and the efficiency of the recruitment process.

In addition to reducing the size of the applicant pool, the informal referral process results in a pre-screened pool of job applicants, which may improve the efficiency of the search by affecting the quality of the candidate pool.(51)  Rather than an employer screening each candidate's application "cold," as is the case with direct and walk-in applications as well as applicants found through advertisements, candidates who are referred via an existing employee have already been through an initial screening process by the referring party.(52)

The screening carried out by a firm's employees may be considered especially reliable by employers for a number of reasons. Employers apparently feel that it is in their workers' own self-interest to refer the most qualified candidates — as poor quality referrals might reflect negatively on the referral source. In addition, employers report that they expect their employees to be embedded in social networks of similar others, and therefore referred applicants are deemed qualified by association. Moreover, referring employees — who are familiar both with the job and with their social network members — are believed to be in a unique position to evaluate the "fit" of an employee with a workplace, and may therefore be able to best assess a candidate's promise.(53)  Thus, the extent to which employers take advantage of the various search strategies may not only have to do with the front-end cost of the search method, but also the perceived benefits of the method in terms of how well it is able to screen the kinds of applicants an employer seeks.

This screening function provided by informal referrals may be viewed as particularly valuable to employers who seek candidates with few formal skills but with strong "soft skills," such as the ability to get along with coworkers and customers and desired work habits (e.g., punctuality, willingness to take supervisor orders).(54)  Because worker qualifications such as these are highly valued yet difficult to infer from employer-administered skills tests and educational credentials, an informal referral from an existing employee who possesses these traits may be a useful proxy given the lack of a more diagnostic screening procedure.(55)  Moreover, because social networks themselves tend to be racially and ethnically segregated, informal network referrals may be one way in which employers who prefer hiring workers from a particular racial or ethnic group can implicitly screen for the race and ethnicity of their applicants. Thus, the informal referral is viewed as a valuable means of screening a candidate's qualifications and competence and may be one manner in which employers can subtly exercise group-based preferences.

Although formal organizations like public and private employment agencies also perform an initial screening of applicants, employers may have less confidence in the formalized screening process as compared with that which occurs "naturally" within informal networks. Employers, especially those who are looking for workers with limited formal skills but strong soft skills, may be concerned about the quality of referrals sent from organizations that rely primarily on objective screening criteria.

Moreover, employers may also mistrust formal employment agencies because of concerns regarding the applicant pool these organizations typically serve. Formal organizations often serve disadvantaged groups whose members are believed to be poorly prepared for the labor market (e.g., unemployed job seekers, welfare recipients, urban youth) and toward which society holds generally negative attitudes. As a result, there may be a stigma attached to candidates referred from such places, leading employers to avoid them. For example, a referral from a welfare office may increase the saliency of an employers' preconceived beliefs about the work skills and qualifications of welfare recipients in general, which may in turn predispose employers to act unfavorably toward such organizations. Similar arguments have been made about employer attitudes toward the public employment service and voucher programs that provide tax credits to employers who hire workers from targeted groups.(56)  Such signals about the quality of a "typical referral" from a particular organization may or may not be accurate on average, but because many employers shun these services, even the most qualified candidates who rely on formal organizations will be disadvantaged in the hiring process. Although informal referrals may also be drawn from a generally disadvantaged group, employers apparently believe that, compared to formal organizations, their existing employees are both more motivated and more able to effectively differentiate qualified from less-qualified candidates.

Lessons Learned: Is There a Mismatch?

The answer to the question of whether there is a mismatch between the search strategies of workers and employers is not a straightforward one. If the question is to be interpreted solely in terms of whether there is an overall match between the types of search methods employed, there is very little compelling evidence that the methods of job seekers are discordant with those of employers. Only in the case of direct application — a method favored by many more job seekers than employers — is there evidence of a significant mismatch by search strategy. And even here, the impact of the mismatch may be limited, given that most job seekers rely on multiple methods of job search. Concerning the other methods examined, both employers and job seekers rely on advertisements with limited to moderate success, neither rely predominately on formal intermediaries, and both employers and job seekers clearly recognize the value of informal referrals to the job-matching process. Social network relationships are exploited both on the demand and the supply side, and account for a significant number of hires in a variety of industries, especially for less-skilled occupations. Thus, there does not appear to be a glaring mismatch between the search strategies of workers and the recruitment methods of employers in the low-wage labor market.

However, the finding that both job seekers and employers recognize the value of informal ties and use them to find and fill positions does not lead to the conclusion that the process works to the same end for all job seekers. As was suggested above, not all job seekers are part of effective job networks. The job information gained through informal referrals may be more or less credible depending on the characteristics and status of the individual providing the information and his or her connection to the labor market. Moreover, employers may base their judgments regarding the quality of a referral on their views of the referring party rather than on the actual qualifications of the referred candidate. Thus, a critical examination of the process of finding work and workers, respectively, suggests that the job-matching process is complicated by forces that shape not only the types of search methods used, but the manner in which they are used as well. Attending to these factors results in a less affirmative answer to the mismatch question.

Of course, employers are not all looking for the same types of workers, nor is an informal search method the only strategy that results in successful job matches — leaving open the possibility that those job seekers least likely to benefit from informal referrals will successfully take advantage of other methods. There is some evidence that this does occur. For example, African American workers in public-sector employment are more likely to have been hired through a formal employment agency than through one of the other methods of job search.(57)  However, recent job growth has been concentrated in industries like service and retail that especially favor informal recruitment methods, which may operate to the disadvantage of African American job seekers.

Moreover, employers who rely on other methods such as advertisements and direct applications appear to employ screening criteria that may effectively eliminate the very same job candidates negatively affected by the informal referral process. In particular, like employers who utilize informal referrals, employers who rely on direct applications and advertisements may also search for candidates who possess hard-to-measure "soft skills," and rely on subjective measures to infer a candidate's qualifications as a result. In fact, some employer studies suggest that employers act on information based on group-specific beliefs — or stereotypes — in the screening process of the applicants who come to their attention via advertisements or direct application. Such an argument has been used to explain African Americans' relative disadvantage in obtaining jobs through advertisements and direct applications (where race may be used as a proxy for worker qualifications in the screening process) and their relative success in public employment where more formalistic and less personal screening criteria are used.(58)

One might also caution too rosy an interpretation of the job-matching process for those individuals who appear to be on the winning side of this equation (i.e., groups that have strong footholds in industries because of effective job networks). As was suggested earlier, closely knit ethnically segregated "niches" function not only to exclude some from getting hired, but also to segregate those hired into low-quality jobs in firms with limited future rewards. Such a closed, informal system may take advantage of workers who have lower expectations about workplace conditions or who may be less able or willing to take recourse against negative working conditions. Such a characterization seems most compelling for firms that rely heavily on immigrant labor.

Policy Considerations

Potential Role for Formal Intermediary Organizations.  Given that some job seekers are disadvantaged by a system that relies so heavily on informal network referrals to match workers with jobs, the challenge of policy is to provide effective job-matching alternatives to help socially isolated workers gain entry into otherwise "closed" occupations. Formal intermediary organizations exist largely to serve this function, as they typically assist job seekers who are having difficulties finding employment through other methods. Thus, it is not surprising that national and local attention to formal job placement organizations has heightened with the strengthened mandate to place welfare recipients more quickly into jobs. Although these programs are proliferating, and there is excitement about them based largely on anecdotal evidence, their effectiveness awaits careful evaluation.

There are potential benefits to investing in formal employment and placement agencies; however, there are many hurdles that stand in the way of their effectiveness. On the positive side, such agencies are relatively easy to conceptualize as a policy intervention. Not only do we have existing models to which to refer, but the alternative (to design interventions that exploit informal connections and operate to change employer attitudes toward certain groups of workers) seems somehow more daunting. Moreover, at least in theory, formal organizations should reduce the time and cost to employers of screening applicants who would otherwise come to their attention "cold" via advertisements or direct applications. Thus, intermediary organizations might exert a positive effect on the labor market through improving the efficiency and quality of matches.

However, as has been argued throughout this chapter, the success of formal organizations has been limited to date.(59)  Employers tend to be skeptical about the quality of candidates referred from these agencies, both because these organizations are believed to exercise less discretion during the screening process and because the candidate pool they target is often discredited as a whole. Thus, employment agencies are used as a "last resort" by job seekers and employers.(60)  Moreover, with some exceptions, formal organizations serving disadvantaged workers have paid little attention to the quality of jobs offered by the firms with which they work.

In order for formal organizations to serve as a viable policy option, then, their image as well as their effectiveness would need to be improved. These organizations might try to take on some of the most attractive characteristics of an informal referral system. That is, steps might be taken to provide an inexpensive, efficient service that would be viewed by employers as referring the most qualified candidates for the available positions. To do so, however, it would seem that intimate relationships between firms and employment agencies would need to develop, and agencies would have to focus their attention on screening clientele according to the often subjective criteria most desired by employers.

Such a model has been proposed as an alternative to standard employment agencies and welfare-to-work programs.(61)  These authors call for the development of community-based agencies that are voluntary and reach a wide range of job seekers, develop strong relationships with employers and job seekers, and operate administratively in a professional, flexible, nonbureaucratic fashion. Employers may respond more positively to less-bureaucratic agencies that understand the employment needs of the community and with which they have developed close working relationships. Employers may also be less skeptical of referrals from voluntary employment services that do not target their services to a specific, perhaps mandated and resistant, clientele. Moreover, the community employment agencies proposed as part of this model would recognize that job seekers and employers have a diverse set of needs and would provide a host of individualized services to support job preparation, in addition to job search and placement. Such a comprehensive strategy is important for the success of such agencies because it would address the many needs of job seekers and employers and ultimately improve the overall quality of the candidates being referred and the specific job match of the referrals. With a more fragmented approach that focused solely on job search, one wonders whether any attempt to "informalize" a formal agency would simply result in an agency adopting exclusionary aspects of informal referral practices — for example, by "creaming" and referring the most-qualified applicants while ignoring the needs of those most difficult to serve.

Stronger Enforcement of Existing Anti-Discrimination Laws.  Policies that improve the flow of information between job seekers and employers should certainly ameliorate the job-matching process. However, solving the information problem alone may not be enough. Employers who are satisfied with the current system, despite its information limitations, may not take advantage of policies that could improve their ability to make more informed matches. Moreover, as this chapter has indicated, studies suggest that employers may rely on an applicant's category membership as a screening device when sifting through advertisements and direct applications, and may prefer informal referral-based recruitment because it produces an ethnically and racially homogenous workforce. To the extent that these practices are motivated by discriminatory hiring preferences on the side of employers, a change in job search practices may not result from better information alone.

Thus, in addition to improving the information available to job seekers and employers, we also need to address discriminatory hiring practices. The enforcement of anti-discrimination laws at the hiring stage has been limited to date,(62) despite evidence that race and gender characteristics are used as signals to infer applicant qualifications in the hiring process. Thus, policy efforts might be wisely directed at greater enforcement of Equal Employment Opportunity programs, focusing on firms that demonstrate a preference for hiring certain workers over others despite comparable qualifications. Such a direction would be a necessary first step toward alleviating the continued unequal treatment of applicants based on group membership.

Tax Credits to Employers for Hiring Disadvantaged Job Seekers.  Another approach to facilitating successful matches between employers and workers concerns altering the incentives for employers to hire the job seekers who come to their attention but who they reject. Investment in human capital and skill development that would ultimately produce a more qualified applicant pool is, of course, one important way to do this from the supply side. However, many employers do not reject workers based on their education and skill credentials but rather for other more subjective reasons. Thus, demand side solutions have been proposed as well, in particular the provision of monetary incentives (tax credits) to employers who are willing to hire disadvantaged job seekers (e.g., welfare recipients, urban low-income youth).(63)  Such approaches have been in existence in the U.S. for over 30 years, and have received renewed attention by the Clinton administration as part of its overall welfare-to-work strategy.

Tax credit programs have traditionally been underutilized by employers who may not view the incentives as substantial enough given the perceived risk involved in hiring the most disadvantaged workers.(64)  In fact, some research suggests that these programs can actually operate to reduce a targeted job seeker's chances of being hired by making salient the stigmatized category to which the candidate belongs. This stigma hypothesis suggests that rather than being viewed as an incentive by an employer, a tax-credit voucher simply draws attention to a job seeker's potential deficits. Moreover, employers who do utilize tax credits may continue to shun the most disadvantaged of the targeted group and offer positions to candidates that they would have hired otherwise without the incentive.(65)  In a discussion of these considerations, Katz (1998) concludes that when wage subsidies such as tax credits are used in conjunction with aggressive job creation, training, and retention services they prove valuable; however, as "stand-alone" policy initiatives, their effectiveness is questionable. Thus, like investments in formal intermediary organizations, wage subsidy programs may need to be part of a more comprehensive employment strategy for them to truly be successful.


This paper has been concerned with the extent to which there are problems of informational access that complicate the matching of workers with jobs. Whereas it is certainly important to assess the extent to which there is an informational mismatch between individuals seeking jobs and employers seeking workers, it is also important to recognize that successful job matches are only a first step toward strong labor market attachment. The role of changing skill requirements, barriers imposed by race, sex, and other group statuses, and broader labor market conditions are crucial determinants of labor market opportunities that cannot be properly understood (or overcome) through a narrow look at job search strategies. Moreover, although policies that ultimately result in an improvement in job matching through closer attention to search strategies may benefit individual workers, these policies may not have corresponding effects on the aggregate labor market.(66)

Beyond these more long-term considerations, however, the findings reported in this chapter do suggest that problems of informational mismatch are important and may affect the employment prospects of some workers. Employers exploit search strategies that they believe will target qualified candidates inexpensively and efficiently. For many employers in the low-wage labor market, informal referrals represent such a low-cost and efficient strategy. Especially when job qualifications are difficult to ascertain through objective means, employers may find that the informal referral process includes an invaluable and trustworthy screening function not available with other methods.

Job seekers also disproportionately rely on the informal referral process in their search efforts. However, whereas many job seekers successfully find employment from informal referrals, those who are socially isolated from job networks or whose network members do not provide effective referrals are disadvantaged. Employers may selectively act on referrals from those employees they deem most qualified or productive, while ignoring the referrals of less-desirable employees. Thus, the informal referral process often produces referrals from a homogenous, closely knit network of individuals, and it can result in quite segregated workforces that are difficult to penetrate from the outside.

Moreover, the workers who are likely to benefit least from the informal referral process are also likely to be disadvantaged by many of the other search methods. This is because in their efforts to recruit efficiently and inexpensively for positions that increasingly demand difficult to measure "soft skills," employers may infer information about a worker's qualifications from categorical information such as race, sex, welfare status, or other group memberships. Thus, an employer may believe that African Americans, central city residents, or welfare recipients are less likely to be good workers, and then use those individual characteristics as a negative flag when reviewing direct applications or responses to advertisements. These same employers may avoid relying on formal search methods altogether because formal agencies are less likely to rely on such proxy information or subjective screening criteria. Thus, efforts to improve the information that employers and job seekers have about each other through the better matching of search strategies would also need to address the underlying motivations guiding employer preferences that may ultimately result in discriminatory hiring practices.


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1.  Blank (1997); Danziger and Gottshalk (1995).

2.  Mishel and Bernstein (1994); Freeman (1994).

3.  Hughes (1995); Holzer (1996); Wilson (1987).

4.  Mier and Giloth (1985).

5.  O'Regan and Quigley (1998).

6.  See, for example, Holzer (1987).

7.  Granovetter (1995).

8.  Ports (1993).

9.  Granovetter (1995).

10.  See Abraham's comments in response to Bishop (1993) regarding how search method choice and effectiveness might be affected by labor market conditions.

11.  Studies that measure offer-to-application ratios are based on surveys of job applicants rather than employers (see, for example, Holzer 1987).  Whereas Holzer's (1996) employer study provides information on applicant-to-hire ratios from the demand side, the data are not disaggregated by search method.  Most employer studies choose to operationalize effectiveness of job search as the method that is "most important" to an employer (e.g., Braddock and McPartland 1987), or the method that was actually used in the case of the most recent hire (e.g., Holzer 1996).

12.  Abraham's response to Bishop (1993), Holzer (1996), and Marsden and Campbell (1988) all discuss these methodological difficulties in greater depth than is presented here.

13.  Holzer (1987); Blau and Robins (1990).

14.  See Falcon and Melendez (1997); Oliver and Lichter (1996); Corcoran, Datcher, and Duncan (1980); Marsden and Campbell (1988); Ullman (1968); Ludwig (1998); Henly (1999).

15.  Waldinger (1997); Kirschenman and Neckerman (1991); Henly (1999).

16.  Waldinger (1997); Kirschenman and Neckerman (1991).

17.  Falcon and Melendez (1997); Oliver and Lichter (1996). For jobs that require a college degree, whites are significantly more likely to be hired than other minorities when informal networks represent the preferred recruitment strategy (Braddock and McPartland 1987).

18.  Ports (1993).

19.  Marsden and Campbell (1988); Holzer (1987).

20.  Holzer (1996); Braddock and McPartland (1987)

21.  Holzer (1987).

22.  Holzer (1996).

23.  Marsden and Campbell (1988).

24.  Braddock and McPartland (1987).

25.  Ports (1993).

26.  Corcoran et al. (1980); Marsden and Campbell (1988). Although job seekers can also advertise their services in media publications, the job search literature on advertisements primarily concerns the posting of advertisements by firms and the response to these advertisements by job seekers.

27.  Holzer (1996); Reingold (1997).

28.  Holzer (1987).

29.  Braddock and McPartland (1987).

30.  Holzer (1996).

31.  Holzer (1996); Marsden and Campbell (1988).

32.  Henly (1999); Newman (1999).

33.  Bishop (1993); Holzer (1996); Marsden and Campbell (1988).

34.  We might expect the use of public employment agencies to fluctuate as the number of job losers eligible for unemployment insurance fluctuates because registration with the public employment agency is mandatory for all eligible job losers who wish to collect unemployment benefits.  Consistent with this reasoning, Ports (1993) reports a decline between 1970 and 1992 in the use of public employment agencies among unemployed job seekers, and suggests that this may be due to the fact that the number of unemployed individuals who are actually eligible for unemployment insurance declined over this period.

35.  Marsden and Campbell (1988); Reingold (1997).

36.  Holzer (1987); Oliver and Lichter (1996); Braddock and McPartland (1987); Valenzuela (1999).

37.  See Lane in this volume for a fuller discussion of job turnover.

38.  See Bishop (1993) for a review of these studies.

39.  Bishop (1993).

40.  Grieco (1987); Stack, forthcoming.

41.  Henly (1999); Granovetter (1995).

42.  Coverdill (1994); Staiger (1990).

43.  Corcoran et al. (1980) .

44.  Bridges and Villemez (1986); Marsden and Hurlbert (1988).

45.  Holzer (1996).

46.  Holzer (1996) notes the ambiguous interpretations of these multi-variate findings.  Rather than recruitment strategies driving wages, it is plausible that employers use particular recruitment methods because they are most likely to target employees of a particular skill level (and which therefore merit a particular wage).

47.  Korneman and Turner (1994); Falcon and Melendez (1997).

48.  Oliver and Lichter (1996); Braddock and McPartland (1987). The relevance of network member status is discussed in depth in Lin, Ensel, and Vaughn (1981).  Also, for a discussion of network heterogeneity, see Granovetter's discussion of 'strong' versus 'weak' ties (1973, 1995).

49.  Braddock and McPartland (1987); Oliver and Lichter (1996).

50.  Braddock and McPartland (1987).

51.  In the job search literature, screening is generally considered as theoretically distinct from recruitment (as a second stage to the hiring process).  However, as is argued herein, search methods may be chosen in part because of the screening function that they serve.

52.  Employers who rely on advertisements can also exercise some control over the type of applicant pool that they draw, by strategically placing advertisements in media outlets with high levels of a preferred audience. Kirschenman and Neckerman (1991) find that Chicago employers, for example, advertise in newspapers whose readerships are over represented by preferred job candidates (either residents of particular neighborhoods or members of preferred ethnic groups).  Thus, advertisements can also play a screening role, although a more limited one than do informal referrals.

53.  See, for example, Grieco (1987), Waldinger (1997a), Kirschenman and Neckerman (1991), Henly (1999).

54.  See Moss and Tilly (1995) for a more elaborate discussion of "soft skills."

55.  Henly (1999).

56.  See Bishop (1993) on the Employment Service and Burtless (1985) on the stigma of vouchers.

57.  Valenzuela (1999).

58.  For a more elaborate discussion of how race and other stereotypic conceptions might affect employer evaluations, see Kirschenman and Neckerman (1991), Moss and Tilly (1995), and Henly (1999).

59.  At least in the U.S., the record is relatively weak. See Rosenbaum, Kariya, Settersten, and Maier (1990) and Osberg (1993) for the experiences of other countries.

60.  Granovetter (1995); Bishop (1993).

61.  Handler and Hasenfeld (1997, 1999)

62.  Leonard (1990).

63.  See Barnow in this volume for more discussions on hiring tax credits.

64.  Lorenz (1995).

65.  See Lorenz (1995) and Katz (1998) for a review of the research on wage subsidies.

66.  Abraham (1993).

Low-Income Populations