The Selection of Talent Experimental and Structural Evidence from Ethiopia

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 an employer can attract more talented applicants by offering a small monetary incentive for making a job application. The effect is driven by high-ability, low-income jobseekers. A second intervention that doubles the wage offer generates an increase in applicant quality of similar size. These findings are consistent with a model in which talented low-income jobseekers face high application costs and credit constraints. We structurally estimate this model and find that the cost of making an application is large (on average 9-13 percent of the monthly wage), and that 30 percent of individuals are unable to pay this cost because of credit constraints. For the average firm in this market, we estimate that the application incentive has an internal rate of return of 11 percent, substantially higher than the return of the wage increase. However, in a second experiment, we show that local recruiters underestimate these positive impacts, explaining why the use of application incentives is limited. Our findings highlight that subsidising job applications can reduce inefficiencies in the allocation of talent.