Do Friends and Relatives Really Help in Getting a Good Job?

Informal contacts are extensively used by both firms and workers to find jobs and fill vacancies. Thecommon wisdom in the economic literature is that jobs created through this channel are of better qualityand pay higher wages than jobs created through formal methods. This paper explores the empiricalevidence for European countries using the European Community Household Panel (ECHP) and discovers alarge cross-country as well as cross-industry variation in the wage differentials between jobs found throughinformal and formal methods. Across countries and industries wage premiums and wage penalties tofinding jobs through personal contacts are equally frequent. This paper argues that such variation can beexplained by looking at firms' recruitment strategies. In labour markets where employers invest largely informal recruitment activities, matches created through this channel are likely to be of average better qualitythan those created through informal networks. A simple theoretical model is used to show that employersinvest more in recruitment for high productivity jobs and for positions that require considerable training.The empirical predictions of the theory are successfully tested using industry-level data on recruitmentcosts.