Formalized Employee Search and Labor Demand

Firms in developing countries rarely advertise their vacancies publicly and instead use social networks to find new workers. This could constrain their growth, by limiting the size and quality of their applicant pool. We conduct a field experiment with 625 small and medium sized enterprises in Addis Ababa, Ethiopia, in which we subsidize firms’ formal employee search. While our intervention increases the use of formal search channels, we find no average effect on vacancy creation and hires. However, we observe a significant shift towards white collar, professional positions. The average effects mask considerable heterogeneity: firms whose managers predict a positive impact of the intervention on hiring post more vacancies—-though they struggle to fill them. Pessimistic firms reduce their vacancy creation and hiring activity. The temporary use of formal search channels has effects beyond the treatment period, despite most firms reverting to network-based search. Optimistic firms maintain a larger share of white collar hires after the treatment period. Pessimistic firms are discouraged and permanently reduce their hiring levels. This suggests that the exposure to a different segment of the labor market changes firms’ beliefs and hiring strategies.