Do Friends and Relatives Really Help in Getting a Good Job?
The available empirical evidence on the wage effect of finding jobs through informal contacts is mixed. This paper provides a simple theory where, depending on the efficiency of formal search methods, the use of personal contacts can lead either to a wage premium or to a wage penalty. New empirical evidence shows that, in fact, across the countries of the European Union, premiums and penalties to finding jobs through personal contacts are equally frequent and of about the same size. Furthermore, much of this cross-country vari- ation appears to be correlated with measures of the efficiency of formal search channels. In particular, the wage effect of finding jobs through personal contacts is higher in countries with more labor market intermediaries. Differences-in-differences estimates based on the Italian liberalization of the labor recruitment industry confirm this result.