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

02/16/2000

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.