Search Channels of Workers and Firms Over the Business Cycle

Abstract

On the one hand, in expansions it is relatively easier for workers to find jobs, so they rely less strongly on their social networks, which means that hiring through referrals should be less frequent in expansions. On the other hand, firms have difficulties to fill their open positions in expansions and rely more strongly on their social networks, which means that referral hiring may be dominating in expansions. Empirical analysis of the IAB Job Vacancy Survey data of the years from 2000 to 2013 and GSOEP data from 2000 to 2014 show that in the long run there is a positive correlation between the GDP and the proportion of workers hired through their social networks. In order to explain the effect of the productivity change on the search and matching strategies of firms and workers, this paper presents a search and matching model with several search channels. The firm chooses advertisement effort through formal search channels to maximize the asset value of an open vacancy. The workers choose their search intensity through formal channels to maximize the asset value of being unemployed. Calibration results of the model show that during expansions formal advertisement is not gainful for the firms because of competition. As a result, the firms advertise less, so the proportion of referral hiring should increase. While when the productivity increases, employment becomes more gainful, so the workers exert more effort in search through formal channels. As a result, the proportion of referral hiring should decrease. Both the estimation and the calibration results indicate that the firm-side effect dominates.