Informal Networks in the Italian Labor Market

In this paper I focus on the effect of informal networks on individuals’ job search and earnings. In the empirical analysis, conducted on data drawn from the 1991 and 1993 Bank of Italy Survey of Household Income and Wealth, I show that while seeking work through informal networks (referrals by friends, relatives, or acquaintances to potential employers) increases the probability of receiving job offers, it is also associated with lower earnings. In a regression of annual earnings on human capital variables and a dummy for whether the worker was hired via informal networks, the latter displays a negative and statistically significant coefficient. I consider two alternative explanations: unobserved low skills/ability and firms’ attributes. I find that while controlling for the latter halves the magnitude of the effect, it does not remove it entirely.