Informal Referrals, Employment, and Wages: Seeking Causal Relationships Ana Maria Diaz Abstract. Employers and job seekers rely extensively on informal referrals to fill vacancies or to find a job. The widespread use of job contacts has been largely associated with labor outcomes, such as finding a job or even affecting wages. This paper explores whether the use of informal referrals on the job search process affects labor market outcomes of Colombian urban workers. Results indicate that informal referrals are slightly more successful than other job search strategies in term of job seeker’s placement. However, referred workers earn in average less than their non-referred counterparts. Yet, this is only true in formal-sector positions. 1. Introduction Colombia does not have a centralized Unemployment Insurance system, public job search assistance programs perform poorly, and private employment agencies are limited. Such institutional environment may lead to important differences in the nature and impact of the job search process. As a matter of fact, in Colombia employers and job seekers rely extensively on job informational networks to fill vacancies or to find a job. As an indication, 70 per cent of salaried workers declare to have obtained their actual job through friends, relatives, or colleagues. Similarly, 40 per cent of unemployed workers report using job informational networks as the main method to seek for a job. But, is this high reliance on informal referrals affecting labor outcomes of Colombian workers? This paper tries to answer this question by exploring the relationship between individual job search strategies and two observed labor market outcomes, namely the probability of being employed and wages. Recent economic literature associates the widespread use of job contacts with labor market outcomes. In general, theoretical models agree that job seekers using informal job search strategies receive and accept more job offers than workers who use other sources of informa- tion about job openings. These improved matching opportunities of referred workers arise from the reduction in information asymmetries between job seekers and potential employers (Holzer, 1987b; Montgomery, 1991; Mortensen and Vishwanath, 1994). Although job-related information can be acquired through formal methods, it can be obtained more rapidly through informal referrals (Aguilera, 2002). Moreover, in labor markets undermined by various sorts of frictions and long spells of unemployment, job seekers may use informal Ana Maria Diaz, Pontificia Universidad Javeriana, Calle 40 No 6-23. Piso 7, Bogota, Colombia. E-mail: a.diaze@javeriana.edu.co. I am grateful to Bart Cockx, Muriel Dejemeppe, Giordano Mion, Florian Mayneris, Sofia Pessoa e Costa, Silvia Espinosa, and two anonymous referees, for helpful comments and suggestions. Any remaining errors are my own responsibility. I am also indebted to the International Relations Office (ADRI) of the Université Catholique de Louvain for financial support. LABOUR 26 (1) 1–30 (2012) DOI: 10.1111/j.1467-9914.2011.00540.x JEL J21, J24, J31, J64, O17, C26, C24 © 2012 CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd, 9600 Garsington Rd., Oxford OX4 2DQ, UK and 350 Main St., Malden, MA 02148, USA.