The Selection of Talent Experimental and Structural Evidence from Ethiopia∗

Girum Abebe†, Stefano Caria‡, Esteban Ortiz-Ospina§ October 30, 2017

JOB MARKET PAPER [ Latest Version ] Abstract We study how search frictions in the labour market affect firms’ ability to recruit talented workers. In a field experiment in Ethiopia, we show that a small monetary incentive for making a job application enables an employer to attract more talented applicants. The effect is driven by workers with lower income and weaker outside options. It is similar in magnitude to the effect of doubling the wage offer, which we also estimate experimentally. These results are consistent with a model in which talented jobseekers face large application costs and credit constraints. We structurally estimate this model and find that the cost of making an application is large (9-13 percent of the monthly wage on average) and positively correlated with ability. An estimated 30 percent of individuals are unable to pay this cost because of credit constraints. For the average firm in this market, we find that the application incentive has an internal rate of return of 11 percent. However, in a second experiment, we show that local firm managers underestimate these positive impacts, explaining why the use of application incentives is limited. Our results show that frictions in the labour market can harm firms and distort the allocation of workers’ talent. ∗

We are grateful to Abi Adams, Nava Ashraf, Oriana Bandiera, Vittorio Bassi, Stefano DellaVigna, Marcel

Fafchamps, Erica Field, Simon Franklin, Douglas Gollin, Clement Imbert, Supreet Kaur, Philipp Kircher, Jeremy Magruder, David McKenzie, Guy Michaels, Paul Niehaus, Imran Rasul, Chris Roth, Simon Quinn, Yared Seid, Alemayehu Seyoum Taffesse, Chris Woodruff for helpful comments and to Koen Maskaant and Alemayehu Woldu for outstanding research assistance. We acknowledge funding from the IGC (Project No. 1-VCC-VETHVXXXX-32304). The project would not have been possible without the support of Rose Page, Simon Quinn, CSAE and EDRI. † Ethiopian Development Research Institute. Email: [email protected] ‡ University of Oxford. [email protected], Web: stefanocaria.com § University of Oxford. Email: [email protected]

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Introduction

Hiring talented workers is key for firm productivity and growth. However, attracting the right workers can often be difficult for firms. In many labour markets, the pool of available talent is limited because jobseekers do not have the time and resources to apply for all suitable jobs. In these markets, offering a competitive wage does not guarantee that the right candidate will apply for the position. Thus, unless firms can find alternative ways to attract and select workers, talent will be misallocated. This can generate large costs for firms and for the whole economy (Hsieh and Klenow, 2009; Hsieh et al., 2013; Hoffman et al., 2015; Algan et al., 2017). In this paper, we provide the first experimental evidence on how application costs affect firms’ ability to recruit talented workers. One view is that these costs actually help firms to screen out unsuitable candidates. This would be consistent with the screening role that application costs are believed to play in other contexts, for example the targeting of social assistance programs (e.g. Alatas et al. (2012)). On the other hand, if talented workers struggle to find the time and money required to complete job applications, high application costs would limit the firm’s ability to make good hires. This would decrease firm productivity and hinder the efficient allocation of talent. We investigate the role of application costs in the context of a developing country. In developing economies, jobseekers often have limited financial resources and are engaged in informal, short-term jobs to generate income (Abebe et al., 2016). The opportunity cost of the time and money required to complete the application process in a fo