When Strong Ties are Strong: Networks and Youth Labor Market Entry* Francis Kramarz and Oskar Nordström Skans - PDF

When Strong Ties are Strong: Networks and Youth Labor Market Entry* by Francis Kramarz and Oskar Nordström Skans Abstract The conditions under which young workers find their first real post-graduation

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When Strong Ties are Strong: Networks and Youth Labor Market Entry* by Francis Kramarz and Oskar Nordström Skans Abstract The conditions under which young workers find their first real post-graduation obs are both very important for the young future careers and insufficiently documented given their potential importance for young workers welfare. To study these conditions, and in particular the role played by social ties, we use a Swedish population-wide linked employer-employee data set of graduates from all levels of schooling which includes detailed information on family ties, neighborhoods, schools, class composition, and parents and children employers over a period covering years with both high and low unemployment, together with measures of firm performance. We find that strong social ties (parents) are an important determinant for where young workers find their first ob. The effects are larger if the graduate s position is weak (low education, bad grades), during high unemployment years, and when information on potential openings are likely to be scarce. On the hiring side, by contrast, the effects are larger if the parent s position is strong (long tenure, high wage) and if the parent s plant is more productive. The youths appear to benefit from the use of strong social ties through faster access to obs and by better labor market outcomes as measured a few years after entry. In particular, workers finding their entry obs through strong social ties are considerably more likely to remain in this ob, while experiencing better wage growth than other entrants in the same plant. Firms also appear to benefit from these wage costs (relative to comparable entrants) starting at a lower base. They also benefit on the parents side; parents wage growth drops dramatically exactly at the entry of one of their children in the plant, although this is a moment when firm profits tend to be growing. Indeed, the firm-side benefits appear large enough for (at least small) firms to increase ob creation at the entry level in years when a child of one of their employees graduates. * We thank seminar participants at Dauphine University in Paris, Uppsala University, Stockholm University,Växö University, Penn State University, Sciences-Po in Paris, Venice University, the Nordic Summer Institute in Labor Economics, VATT in Helsinki, CEE in Marne-la-Vallée, CREST lunch seminar, Ente Einaudi in Rome, ESSLE in Ammersee, CEMFI in Madrid, NBER Summer Institute, Winter Meetings of the Econometric Society in Chicago, LMDG workshop in Sandberg, SOLE meetings in London, CEREQ in Marseilles, ETH in Zürich, WIFO in Vienna, University of Venice, University of Lyon (Gate), Collegio Alberto in Turin for their remarks, and Daron Acemoglu, Joe Altoni, Raquel Fernandez, Anders Forslund, Giacomo di Giorgi, Ulrike Malmendier, Kaivan Munshi, Manasa Patnam, Luigi Pistaferri, Jean-Marc Robin, Melissa Tartari, Yves Zenou for extremely helpful comments and suggestions. We also want to thank the four referees and the editor of this ournal for their extremely constructive remarks. Center for Research in Economics and Statistics (CREST), CEPR, IZA, IFAU, Institute for labour market policy evaluation (IFAU), Uppsala University, Uppsala Centre for Labor Studies and IZA, 1 1 Introduction Labor market entry is a defining moment for young workers when important decisions must be made. 1 In this process, the finding of a first real ob is essential. 2 However, the precise strategies used by young ob searchers when looking for entry obs are not well-understood. Since previous studies have documented the importance of social ties in the process of matching workers and firms in many parts of the labor market, we conecture that the use of social ties and networks are central ingredients in young workers transition into the labor market. This paper therefore stands at the unction of the literatures on school-to-work transitions and social ob-finding networks and our aim is to provide a first thorough analysis of how social ties affect the labor market entry of young graduates from different levels of schooling. We focus on the role of strong social ties, we show their importance, identify their nature, and their effects using a unique population wide data set linking graduation records and family ties to a longitudinal matched employer-employee data set with information on the firms (sales, profits) and plants. We also examine the importance of weaker ties, such as classmates or neighbors. The seminal work of Granovetter (1973, 1983) formulated much of the economic and sociological thinking regarding ob-finding networks by distinguishing between strong and weak social ties (i.e. close friends or family vs. acquaintances). A central finding in Granovetter s work is that weak social ties are important components of the labor market since such ties bring new information about vacancies between agents with different information sets. The strength of weak ties hypothesis has also been central in much of the recent empirical work on ob finding networks based on register data where networks are often defined through neighborhoods or shared immigrant background (see references below). Other strands of the network literature have however pointed at the importance of strong social ties and such strong ties should be particularly relevant for young workers who are in the process of entering the labor market. Boorman (1975) presumed that employed agents first disseminate information about vacancies to their strong social ties, and only spread information to weaker acquaintances if closer friends already are employed. This channel, which may be thought of as a form of nepotism through privileged information, may be particularly important in cases when the social ties provide links to young workers struggling to find their first obs. A different channel is suggested by Montgomery (1991), in a model of employee selection where firms choose to recruit 1 See among many contributions, Keane and Wolpin (1997). 2 See e.g. Beaudry and DiNardo (1991) and recently Kahn (2010) on the impact of unemployment on wages of new hires. 2 workers with social ties to productive incumbent employees in order to find suitable workers when ex ante information about worker quality is imperfect, a precondition which is particularly likely to be relevant for young, untested, workers. 3 Since this argument builds on the presumption that good workers associate with other good workers it arguably makes more sense the stronger the ties are between the workers. One argument for firms to rely on networks for recruitments is monitoring, in particular Heath (2013) develops a model where the referrer is punished if the referred worker misbehaves (see also the model in Dhillon, Iversen, and Torsvik, 2013). In order to motivate the latter to exert effort, social ties between these agents have to be strong. Job finding networks as tools for disseminating information between (prospective) workers and firms are likely to be particularly important in cases where information about suitable obs is scarce and ex ante information about worker quality is noisy. We argue that these conditions are likely to be relevant for young workers who lack previous work experience. Even if the education system may compensate for such information deficiencies to some degree, uncertainty about graduates quality will vary with the type or level of education. This is likely to be especially true for the loweducated young, with a non-technical and non-specific type of training. For these reasons, our analysis of young workers entry into the labor market is focused on the use of strong social ties, although we also provide an analysis of various weak social ties as a contrast. When separating these two types of social ties, we rely on Granovetter who defined the strength of social ties by a combination of the amount of time, the emotional intensity, the intimacy (mutual confiding), the reciprocal services which characterize the tie. (Granovetter, 1973, p. 1361). Thus, family ties are the archetypical form of strong social ties, whereas neighbors, classmates, and the parents of classmates are good examples of weak ties. Survey evidence indeed suggests that family ties are an empirically important source of information in the ob finding process. Data from the International social survey program ISSP (2001) for 30,000 respondents spanning 30 developed countries suggest that more than 10 percent of respondents found their last ob through the immediate family (parent, brother or sister), 4 7 percent from other relatives and 13 percent from close friends. Notably, the ISSP survey cover all age groups whereas our analysis focuses on the young, where family ties could be expected to matter 3 See also Dustmann, Glitz, and Schönberg (2011) who models social ties as a means to reduce uncertainty about match quality. 4 The survey does not cover Sweden from where we draw our data but the average across neighboring Norway, Finland and Denmark was 6 percent, and for the US 5.4 percent. 3 the most. 5 If this conecture is right, our focus on strong social ties is set to teach us something important on entry on the labor market of children ust graduating from the education system, in particular how social ties precisely operate at this stage of a worker s career. Previous literature: In the first statistical analysis we are aware of, De Schweinitz (1932) reports that, in 1923, more than 40% of workers in the hosiery industry in Philadelphia obtained their obs through friends and relatives. Since then, the importance of informal channels as a ob finding resource has been documented by numerous surveys. Although results vary substantially between studies (mostly ranging from 30 to 60% according to Bewley, 1999) the use of informal contacts appear to be pervasive irrespective of occupation or country. 6 Consequently, the existing literature is now burgeoning both on the theoretical 7 side and on the empirical 8 side after a period of relative calm following the path-breaking articles of Rees (1966), Granovetter (1973), and Boorman (1975). The part of the previous empirical literature which is most closely related to ours in a methodological sense has primarily been investigating whether the neighborhood constitutes a source of information and thereby trying to give a more precise content to the general concept of a social tie. Topa (2001) explained the clustering of unemployment within Chicago neighborhoods using a probabilistic approach for the likelihood of a contact (which allows for spillover of information across census tracts). Bayer, Ross, and Topa (2008), uses micro-level census data for Boston, and find that those who live on the same block are more than 50% more likely to work together than those living in nearby blocks. Laschever (2005) relies on the random assignment of American WWI veterans to military units. Using a small data set (n=1,295), he is able to show that an increase in peers unemployment decreases a veteran s likelihood of employment. Laschever s focus is identification of various peer effects. To perform his identification of peer effects, he contrasts two reference groups for each veteran: those who served with him at WWI and his closest neighbors (in terms of physical distance) at the 1930 Census. 5 Results from the first wave of the U.S. NLSY1997 show that 23 percent of employed respondents where either recommended or recruited in a firm where their parents were working (and about 20 percent through other relatives). 6 Although Sweden has a developed system of ob matching through the Public Employment Service (PES) relying on a national data base of vacancies, the market share of the PES has always been low. Survey evidence show that the most prevalent channel for youths to find obs is through networks; 40 percent of year olds who were employed in 2004 claim that they found their obs through people they know whereas less than 6 percent found the ob through the PES (Ungdomsstyrelsen, 2005). 7 See Montgomery (1991) or more recently Calvó-Armengol, Verdier and Zenou (2007), Ballester, Calvó-Armengol and Zenou, (2006), Calvó-Armengol (2004), Calvó-Armengol and Jackson (2004) and (2007), Casella and Hanaki (2008), and Galeotti and Merlino (2011) among many authors, and Jackson (2004) and (2008) for very thorough surveys. 8 See e.g. Munshi (2003) Bandiera, Barankay and Rasul (2009) Bayer, Ross and Topa (2008), Bertrand, Luttmer and Mullainathan (2000) Fredriksson and Åslund (2009), Dustmann, Glitz, and Schönberg (2011) among many authors, and Ioannides and Loury (2004) for a very detailed survey. 4 A new set of papers (Cingano and Rosolia, 2012, Åslund, Hensvik and Skans, forthcoming, and Dustmann, Glitz, and Schönberg, 2011 are good examples) looks at matched longitudinal employeremployee data to follow workers who have worked in the same firm at some point in time or share ethnicity and check if the characteristics of their network (former or present co-workers) has an impact on ob search or other outcomes. Cappellari and Tatsiramos (2011) use a novel source of information on individuals and their friends collected within a British panel (BHPS) to examine how friends employment affect individuals own employment. Finally, Corak and Piraino (2011) use data somewhat similar to ours but focus on intergenerational earnings mobility for men who have the same main employer as their fathers (but were not necessarily simultaneously employed at the same firm). By contrast with our analysis, their focus is clearly not on social ties at the moment of entry on the labor market. The literature so far contains very little evidence on firm-side responses to social ties. A few notable exceptions are Kramarz and Thesmar (forthcoming) for French CEOs as well as single-firm field experiments and lab experiments (e.g. Bandiera, Barankay and Rasul, 2007 and Beaman and Magruder, 2012), all showing that firm performance tends to be negatively affected by the use of networks when managerial incentives are low. Another very recent exception is Brown, Setren, and Topa (2012) who use evidence from a single firm s employee referral system to examine various predictions of theoretical models of referrals. Among other findings, in the analyzed firm, referred workers experience an initial wage advantage. As far as we know, however, the literature so far is void of large-sample studies documenting how firms adust hiring patterns or wages of incumbent workers in response to the use of social ties. Our contribution: In contrast to the existing literature and (to the best of our knowledge) for the first time, we examine the role played by social ties using an empirical strategy which relies on directly observing all three components of a potential match: the worker looking for his or her first ob, the employed worker on the other end of the social tie, and the firm. To accomplish this task, we focus on links between children and their parents, and contrast these with various examples of weak ties. We analyze how supply side (the graduate) characteristics, demand side (firm) characteristics, and the agent of the match (the parent) characteristics interact to determine when and by whom the social ties are used to form a match, and how the use of these ties affects subsequent outcomes for all agents involved. In particular, we try to assess the benefits and limits of the resulting exchange for all three participants. 5 We use comprehensive data on all Swedish students graduating from compulsory school, high school, or universities/colleges during an eight year ( ) period and follow each cohort for seven years. These data are linked to graduation records and a population-wide set of very accurate intergenerational indicators as well as longitudinal workplace, neighborhood identifiers and measures of firm performance. We use these data to estimate how the presence of a parent within a plant affects the probability that a young graduate finds employment within the same plant. Since social ties may correlate with other complementarities between workers and firms, identification of the effects of social ties requires careful treatment of the data. Our baseline specification uses classmates to estimate the counterfactual probability of entering each plant, but we also show that the estimates are robust to a wide set of variations including those comparing similar graduates with parents in different plants within the same firm as well as specifications where we use classmates whose parents used to work within the very same plants to estimate the counterfactual. Relying on network information from parent-child links in register data we are not in the capacity to directly measure if a referral took place (in contrast to single firm studies using data from human resource departments such as e.g. Brown et al, 2012). We are also not able to directly measure the type of information flows that are associated with the social ties. Our data, however, allow us to compare situations when the parent is present in the actual plant versus when the parent has recently left the plant, as well as to perform comparisons across plants within the same firm. These exercises allow us to uncover the role of the social ties, net of factors related to potential intergenerational correlations in firm-specific skills. In addition, our data allow us to perform a varied set of additional, and unique, empirical exercises, e.g. by identifying differences in effects between graduates with or without parental links to the same plant; by exploring the consequences of social ties for the parent (after showing that he/she is the agent of the match) and for the firm (on hiring), as well as tentatively exploring the links between the use of social ties and productivity/ profits. To preview our results, we find that strong social ties are important, but only if the parent is present within the plant, i.e. not in other plants of the same firm, and not if the parent has left the plant. Strong ties are particularly important for low educated youths, whereas the impact of weak ties tend to be largely independent of the level of education. 9 Strong ties matter more for low educated 9 Our analysis excludes self-employed parents. 6 graduates with low grades, even after accounting for firm-specific heterogeneity and many other aspects of parental heterogeneity. For a given level of education, strong ties also appear to be more important the less specific (i.e. targeted to a specific type of occupation or firm) the training is. Even though the aggregate consequences of ob finding networks can be negative, for instance because of a reduced match quality (see Bentolila, Michelacci and Suarez, 2010, Pellizzari, 2010, and Horvath, 2012), the use of social ties in the matching process should benefit all agents that are directly involved in the recruitment for the match to take place. Indeed, our analysis shows that the youths who find employment in plants in which they have a strong social tie seem to benefit in terms of much shorter school-to-work transitions, and better labor market outcomes at a few years horizon (employment, wages) than comparable youths from the same classes or entering the same plants; benefits that should be particularly useful in the high unemployment years when the social ties are used more frequently. However, they seem to pay a price in terms of lower entry wages and their training also provide a less frequent match to the receiving industry relative to comparable youths. Even though the parent s wage growth is shown to be negatively affected by the entry of the child in the parent s plant, the parent is likely to benefit from the increased and accelerated financial independence of their child. We also document notable benefits on the firm side. Hiring of employees children is more frequent when the pa
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