Policy Brief Issue 24 OVERCOMING INFORMATION ASYMMETRY IN JOB SEARCH: THE POWER OF A REFERENCE LETTER GENDER INNOVATION LAB The Gender Innovation Authors: Eliana Carranza and Svetlana Pimkina Lab (GIL) conducts impact evaluations of development KEY MESSAGES interventions in Sub-Saharan Africa, seeking to generate • The labor market is characterized by information gaps evidence on how to close between work seekers and prospective employers, the gender gap in earnings, particularly when it comes to hiring low-skill entry- productivity, assets and level workers. Information asymmetries about workers’ agency. The GIL team is currently working on over skills can result in poorer matches, lower productivity for 50 impact evaluations in 21 employers, and increased inequity for the unemployed. countries with the aim of building an evidence base • One approach to resolving the asymmetry is introducing with lessons for the region. a formal referral system: reference letters from former employers. Through a field experiment in South Africa, The impact objective of GIL is increasing take-up of effective we evaluated the effect of formal reference letters from policies by governments, former employers on youth employment outcomes. development organizations and the private sector in order • We find that reference letters improve firms’ screening to address the underlying ability and employment outcomes, especially for causes of gender inequality women. Reference letters allow firms to identify higher- in Africa, particularly in terms ability candidates and increase the likelihood of employer of women’s economic and call-backs. Women who use the reference letter double their social empowerment. The lab aims to do this by producing employment likelihood, while no effect is observed for men. and delivering a new body of • Despite their high value, the use of reference letters in job evidence and developing a compelling narrative, geared applications is low, partly due to work seekers underestimating towards policymakers, on what their value. Providing job seekers with information on the benefit works and what does not work of reference letters increases the use of this job search tool. in promoting gender equality. http://www.worldbank.org/en/programs/africa-gender-innovation-lab DESIGNING THE REFERENCE LETTER TEMPLATE Subject: Reference for ________________________________ (Name) __________________________________ (Address of Firm) Women who received Firm & To Whom it May Concern: __________________________________ (Address of Firm) reference letter templates Relationship My name is _________________. (Name) I am the _______________ (Position) of _____________________________________________________. (Firm/Business Name) were approximately 50% Our firm is __________________________________________________________________________________________________. (Describe what firm is doing) more likely to be employed Information I have known _________________ (Name) (Time Known) He/She has worked for our firm as a _____________ for __________. (Position) for ___________. (Time Worked) (daily/weekly/monthly) interactions I feel _______________________________ From _______________ (very confident/confident/somewhat confident) to accurately judge his attitude and skills. 50% Attitude Rating Comment Team ability: Ability to work under Very Below Cannot Good Average supervisor and in a team. good average rate Interpersonal skills: Friendliness and Very Below Cannot Good Average communication with customers/co-workers. good average rate Soft Skills Work Ethic: Willingness and ability to work hard. Very good Good Average Below average Cannot rate Reliability: Show up on time and not Very Below Cannot Good Average mismanage funds/equipment. good average rate Agreeability: Responds well to Very Below Cannot Good Average instructions/is able to adapt. good average rate ADDITIONAL COMMENTS on Attitude: __________________________________________________________________________________________________ with employment rates Skill Rating Comment Numeracy: Math skills Very Good Average Below Cannot effectively doubled for those necessary for this job. Literacy: English proficiency, reading/ good Very average Below rate Cannot who used the letters Good Average writing skills needed for this job. good average rate Computer literacy: Use of Windows, Very Below Cannot Good Average Word, Excel, Internet, etc. good average rate Hard Skills Learning ability: Able to pick up new skills quickly Very good Good Average Below average Cannot rate Very Below Cannot Task 1: (describe task) Good Average good average rate Very Below Cannot Task 2: (describe task) good Good Average average rate ADDITIONAL COMMENTS on Attitude: __________________________________________________________________________________________________ Our employment relationship ended because _________________________________________________________________. (Reason for end of employment) Termination I would ______________________________________________________________ (highly recommend/recommend/recommend with reservations) _____________________________________. (Name) & Contact If you have any questions do not hesitate to contact me via phone ________________ and/or email ________________. Sincerely, __________________________________ _________________ Signature Date When hiring low-skilled, entry-level workers, firms HERE’S WHAT WE DID face incomplete information on worker productivity, We started by conducting qualitative interviews forcing employers to rely on network-based hiring with employers to understand the information and proxy signals of workers’ abilities, such as challenges they face when hiring workers. education, gender, race or age. This disadvantages This highlighted the importance of contactable young workers, women, and members of marginalized references during the screening process, groups who have weaker connections to the labor particularly references from former employers. market. In addition, it limits the pool of potential workers available to firms with detrimental effects on We then designed a reference letter template based employee-employer match quality and firm productivity. on feedback from these firms about the type of skills and information prospective employers would SO WHAT TO DO ABOUT IT like to know about the candidate. The reference Encouraging job seekers to obtain references letter included information on ‘hard’ skills such as and use them in job search could help alleviate numerical abilities and literacy, as well as ‘soft’ skills the information frictions between workers and such as motivation, reliability and work ethic. firms. To this end, the World Bank’s Africa Gender Innovation Lab, in collaboration with the Jobs We then conducted a series of experiments. To Group, researchers from Middlebury College, test whether reference letters are valuable to firms, Stellenbosch and Cape Town universities, and the we first submitted applications on behalf of job South African Department of Labour, launched a seekers to vacancies with and without reference field experiment to identify the impacts of a formal letters and compared firm responses. To test referral system on youth employment outcomes. whether reference letters are effective for work FIRM CALL-BACK EMPLOYMENT LIKELIHOOD LIKELIHOOD 30 25 24.7% 20 * 15 13% 10 9.8% 6.6% 5 4.2% ** 0 Control Reference Letter Control Men with Women with Reference Letter Reference Letter seekers, we next encouraged half of job seekers Reference letters are informative and allow to obtain a letter and subsequently followed their employers to identify higher-ability candidates. job search behavior and employment outcomes. The ratings provided by previous employers on the Finally, we tested whether providing information reference letters are highly correlated with numeracy about the effectiveness of the letters helped increase and literacy test results administered at the labor the share of work-seekers who obtain a letter. center, providing prospective employers with reliable information about candidates’ abilities that were HERE’S WHAT WE FOUND previously unobservable. This lead to more effective screening as candidates of higher ability were 63 Despite the high-value that firms put on reference percent more likely to receive an employer response letters, we see a very low prevalence and use of and interview when using a reference letter. reference letters. At baseline, less than 10 percent of our sample of job-seekers used a reference letter in their The evaluation of the candidate provided by job search. Most job-seekers do not ask for a letter, as the former employer matters to prospective they believe that employers would refuse to write one. employers, especially when it comes to female However, we find that the majority of those who asked candidates. Women with better reference letters for a letter (after encouragement) could obtain one. are more likely to receive responses from employers and interview requests. However, the same is not Including a reference letter in a job application observed for men, suggesting that employers increases the likelihood of employer response. are more uncertain about women’s abilities. This Overall, reference letters increased call-backs by firms demonstrates that reference letters are a valuable by approximately 60 percent. Women who included tool particularly for women job seekers. a reference letter had a greater response likelihood than their male counterparts (89 percent) although this Providing job seekers with reference letter gender difference is not statistically significant. This templates improved employment outcomes, is particularly important considering women’s greater and this effect was driven by women. After exclusion from traditional job referral networks. three months, we did not observe an employment effect on men. However, we found that women who received reference letter templates were approximately 50 percent more likely to be employed, with employment rates effectively doubled for those who used the letters, which closed the gender employment gap in the sample. Providing information about the value of reference letters may increase the likelihood of obtaining a reference letter. We found that providing job seekers with information about the benefits of using a reference letter in job search helped increase the share of people who obtained a letter by 67 percent, suggesting that job seekers underestimate the potential value of reference letters. NEXT STEPS Reducing information asymmetries in the labor market has the potential to be welfare improving for both work seekers and firms. Encouraging job seekers to obtain a standardized reference letter from a former employer can lead to substantial improvements in firms’ screening ability and significant employment effects for work seekers – especially for women who face greater constraints in obtaining employment. This low-cost solution can be scaled up within existing employment services infrastructure as a complement to ongoing services for the unemployed. For more information on this study: Abel, M., R. Burger and P. Piraino (2017). The Value of Reference Letters. Policy Research Working Paper. WPS8266. The World Bank. http://documents.worldbank.org/curated/ en/632421513000919521/The-value-of-reference-letters The Jobs Group was created to support World Bank Group (WBG) client countries in the design and implementation of integrated, multi-sector, jobs strategies to reduce poverty and ensure inclusive growth. These jobs strategies articulate policies and programs which address three main challenges most countries face to varying degrees: creating jobs in the formal, private sector; improving the quality of informal jobs; and expanding access to (better) jobs for certain population groups (e.g., women, youth, FOR MORE INFORMATION, the poor). The Jobs Group develops solutions to the main jobs challenges PLEASE CONTACT and measures the impact of these solutions on jobs outcomes. Markus Goldstein www.worldbank.org/en/topic/jobsanddevelopment mgoldstein@worldbank.org Rachel Coleman rcoleman1@worldbank.org 1818 H. St NW This work has also been funded in part by The Umbrella Facility for Gender Equality (UFGE), a World Bank Group multi- Washington, DC 20433 USA donor trust fund expanding evidence, knowledge and data needed to identify and address key gaps between men and women to deliver better development solutions that boost prosperity and increase opportunity for all. The UFGE has received generous contributions from Australia, Canada, Denmark, Finland, Germany, Iceland, Netherlands, Norway, Spain, Sweden, Switzerland, United Kingdom, and the United States. The first draft of this policy brief was released in April 2018.