Are Small Firms Labor Constrained? Experimental Evidence from Ghana

• Departmental Seminar

Date and Location

Wednesday, January 14, 2015, 10:00 AM - 11:30 AM
3001 Plant and Environmental Sciences

Abstract

Small firms in developing countries are typically modeled as facing a frictionless market for workers, characterized by low search costs, full information, and a lack of regulation. We report the results of a field experiment documenting that firms find it costly to hire workers on the open market, that the marginal revenue product of labor is positive and quite large in small firms, and that there is substantial heterogeneity in these returns as a function of (unobserved) worker ability. We study the impact of a program that randomly placed unemployed young people as apprentices with small firms in Ghana. The program provided a novel worker screening technology to firms (in addition to simply reducing search costs), as (voluntary) participation included non-monetary costs for unemployed young people applying to the program. We find that firms that were offered apprentices by the program hired and retained them for at least six months (the end of our study window). Secondly, treatment firms experience increases in revenues and profits of about seven to ten percent per assigned apprentice. Together, these findings suggest the presence of economically significant search costs in our context. Moreover, revenue and profit gains are particularly large for firms treated with high cognitive ability apprentices. This result highlights the importance of worker screening in firms’ hiring decisions, and echoes the widespread use of a sophisticated bond posting mechanism to hire apprentices in our baseline labor market. A simple model in which productivity differences associated with worker ability necessitate costly screening can predict the impacts of our program. In sum, our findings have implications for our basic understanding of labor markets in low-income settings and in particular suggest that high youth unemployment in developing economies is the result, at least in part, of substantial labor market frictions.