Formal Hiring Practices, Firm Growth, and Inclusive Labour Markets

Can firms be encouraged to formalise their hiring process? This project aims to answer this question in the context of Ethiopia, through an RCT that addresses two of the main factors behind the lack of formality.

High levels of urban youth unemployment and a disproportionally large number of small firms with informal, network-based hiring processes are common characteristics of developing economies. This particularly affects youths living in geographically remote areas of towns and young women, who often struggle to access the (scarce) existing opportunities and lack credible signals of their ability. At the same time, informal hiring practices might affect small and medium enterprises' (SMEs) ability to hire productive employees, ultimately impeding business performance and growth.

This project aims to encourage firms to formalise their hiring process, through a Randomized Controlled Trial (RCT). The experiment is designed to address two of the main factors that make firms in developing countries rely on informal, network-based hiring techniques. Firstly, the researchers experimentally improve firms' candidate screening technologies by pre-screening applicants with psychometrically validated measures, and by passing this information on to participating firms. Secondly, they reduce firms' vacancy posting costs by subsidising vacancy postings. Two treatment groups will be selected from a sample of 450 SMEs: one will only receive the first treatment (i.e. the pre-screening), while the other will receive the subsidy as well.

By looking at ways to improve firms' hiring practices, this project contributes to issues related to firm growth, inclusive employment and labour market policies in developing countries. Bad management practices have been found to be an important factor in the low productivity of developing countries. This intervention looks at bad practices in the hiring process, both to foster growth and to make economic opportunities available to all parts of society, and not just the well-connected. This is particularly important in countries with high rates of rural to urban migration and ethnic diversity, such as Ethiopia.