Field research reveals that formal hiring channels reshape labor demand among Ethiopian firms

Formal hiring channels reshape labor demand among Ethiopian SMEs

Small and medium-sized enterprises in low- and middle-income countries often rely on personal networks rather than formal advertising to recruit employees. Their field study in Ethiopia shows that lowering the cost of formal employee search can alter not only how firms recruit, but also the types of jobs they seek to create.

The study provided firms with support to reduce the costs of advertising vacancies through formal channels. Treated firms increased their use of formal search and shifted labour demand towards more demanding white-collar positions.

More ambitious vacancies, limited hiring success

Despite creating and advertising these new vacancies, firms struggled to fill them. This suggests that access to formal recruitment channels alone may not be sufficient to translate employers’ expanded demand into completed hires.

Expectations may explain the mismatch

The findings provide suggestive evidence that expectations contribute to this gap, particularly among firms with little prior experience of formal hiring. Firms may be overly optimistic about the size and quality of applicant pools generated through formal advertisements. At the same time, job-seekers’ wage expectations appear to exceed the wages firms are prepared to offer.

Together, the results highlight a potential coordination challenge in labour markets: formal search can encourage firms to pursue more skilled positions, but mismatched expectations between employers and job-seekers may limit the ability of these vacancies to become jobs.

Article citation

Lukas Hensel, Tsegay Tekleselassie and Marc Witte, 'Formalized employee search and labor demand', Journal of Development Economics, Vol. 184, January 2027, doi.org/10.1016/j.jdeveco.2026.103876.