The Recruitment Paradox: Network Recruitment, Structural Position, and East German Market Transition

Economic institutions structure links between labor-market informality and social stratification. The present study explores how periods of institutional change and post-socialist market transition alter network-based job finding, in particular informal recruitment. We highlight how market transitions affect both the prevalence and distribution of network-based recruitment channels: open-market environments reduce informal recruitment’s prevalence but increase its association with high wages. We test these propositions using the case of the former East Germany’s market tran sition and a comparison with West Germany’s more stable institutional environment. Following transition, workers in lower tiers increasingly turned toward formal interme diaries, active employee search, and socially “disembedded” matches. Meanwhile, employers actively recruited workers into higher-wage positions. Implications for mar ket transition theory and post-socialist stratification are discussed. Personal connections matter for individuals seeking jobs (Granovetter 1995[1974]; Royster 2003), as well as for employers seeking to fill vacant posi tions (Fernandez, Castilla, and Moore 2000; Marsden 2001). Social-network processes are fundamental to understanding the extent to which valued eco nomic resources (i.e., jobs) are allocated either through sponsorship or through formal competition. Labor-market informality represents a crucial mechanism in the reproduction of inequality by generating differential access to opportuni ties (Lin 1999). Social networks, and their role in labor markets, remain central to sociological analyses of economic activity. However, labor-market action is itself embedded in broader economic institutions that variously 905 digitalcommons.unl.edu Research was supported by funds from North Carolina State University’s Faculty Research and Professional Development Grant. We are grateful for detailed comments on earlier drafts from Matthew Mahutga and Tom DiPrete. Previous versions were presented at the 2012 meeting of the American Sociological Association and the summer 2012 meeting of ISA’s Committee on Social Stratification and Mobility (RC28). Correspondence: Richard Benton, Department of Sociology, Duke University, Durham, NC 27708 USA; email [email protected] 906 Be n to n, McDo n a l D, Ma n z o n i , & Wa r n e r i n So c i a l Fo r c e S 93 (2015) include markets, central planning, or post-socialist transitional contexts. This study investigates how market transitions affect the role of personal connections in the labor market. It explores how the former East Germany’s reunification with West Germany altered the prevalence and distribution of labor-market informality. The East German case is an excellent context to explore labor-market change because it offers a natural comparison with West Germany. The extent to which market transitions affect informal job finding remains unclear. Market-transition theory, a dominant approach to studying post-socialist contexts, implies that the adoption of market institutions reduces the dominance of patronage in economic exchange (Nee 1989; Nee and Matthews 1996). As markets come to coordinate exchange, particularistic criteria become less salient and transactions increasingly resemble the “disembedded” action of idealized markets. Yet, recent studies on post-socialist labor markets have found the opposite trend: relative to formal job matches (obtained through advertising and employment agencies, for example), patronage tends to persist or increase in the labor market during the transition from socialism to market capitalism (Yakubovich and Kozina 2000). Theory also suggests that these kinds of trans formations introduce greater meritocracy and reward productivity-enhancing skills (human capital) to a greater extent than other stratification mechanisms (Brainerd 1998). Support for this proposition is equally suspect: while increas ing wage returns to education have been observed in the wake of some market transitions (Nee 1996), others have found increasing wage returns to people who use personal contacts and patronage resources when finding jobs (Bian and Logan 1996; Angelusz and Tardos 2001; Bian, Shu, and Logan 2001; Gerber and Mayorova 2010). Our primary contribution is to develop a deeper understanding of the interplay between institutional dynamics and network-based job matches. While previous research analyzes cross-national comparisons of social-capital use (McDonald, Benton, and Warner 2012; Son 2013), few studies examine how these patterns change over time and even fewer assess variability across periods of institutional change. Our focal research questions concern (1) how market transitions affect the prevalence of informal job finding; as well as (2) how transitions affect infor mal job finding in different positions across the wage distribution. We draw on the literatures on market transitions and the role of networks in job searching. We propose a framework that enhances understanding of how economic tran sitions alter network-based hiring by extending the conventional formal versus informal dichotomy to distinguish how job matches are activated in post-social ist labor markets: by employee search or by employer recruitment. Specifically, we highlight a form of network-based hiring most affected by transition: infor mal recruitment. Drawing on previous research, we clarify how informal recruit ment links the supply and demand sides of the labor market under conditions of institutional change. On the supply side, these matches occur without an explicit job search on the part of the worker (McDonald 2010). On the demand side, they are facilitated through informal networks on the part of employers and their existing employees (Granovetter 1995[1974]; Fernandez and re c ru i t M e n t, Po s i t i o n, a n D ea s t Ge r M a n Ma r k e t tr a n s i t i o n 907 Castilla 2001). Informal recruitment is a network-based job-matching channel linking well-connected workers to employers who selectively recruit through informal channels. We contrast informal recruitment with two other types of job matches: (1) informal job search strategies, where workers actively lean on their con tacts for job finding assistance; and (2) formal searches, where job seekers and employers rely on formal intermediaries and information sources or direct appli cation. While informal recruitment relies on employer activation, these latter types of job matches depend on employee search. Just as job matches are embedded in interpersonal connections, they are also embedded within broader economic institutions that provide the opportunities and constraints governing economic action (Chua 2011; McDonald, Benton, and Warner 2012; Son 2013). Post-socialist market transitions affect informal recruitment in two ways: (1) its prevalence over time; and (2) its distribution across wage groups. First, market transitions introduce an unstable institu tional environment, increased competition, uncertainty regarding worker fit, and a changing occupational structure (Gerber and Mayorova 2010). In the short term, uncertainty encourages widespread informality, while formal inter mediaries remain underdeveloped. In successful transitions, as in Germany, institutions eventually stabilize and formal channels become well established, allowing informal recruitment to recede. Second, dismantling central planning opens opportunities for employers to reserve top positions for personal con tacts, but it also exposes them to competitive pressures in acquiring the best workers. In this context, employers have the opportunity and incentive to turn toward recruitment strategies to fill the most competitive positions. As a result, a “recruitment paradox” emerges during market transition: even as informal recruitment declines overall, it remains relatively important for filling highly valued occupations. Drawing on survey data from the German Socio-Economic Panel (GSOEP), we assess how the transition from socialist to capitalist institutions in East Germany (formerly the German Democratic Republic, GDR) during the 1990s altered the mix of informal job matching across the wage distribution. Prior to reunification, East Germany featured a constitutional right to work and workers could not easily be dismissed once they were hired. Large enterprises dominated the economy and were also the primary venue for distributing a variety of wel fare and social entitlements, including housing, medical services, and retirement support (Lange and Pugh 1998). Reunification resulted in the adoption of the German Economic, Monetary, and Social Union (GEMSU), which transferred the West German corporatist social-welfare institutions—including the national system of social insurance, unions, and employer associations—to the former GDR (Goedicke 2006). Authorities also extended West Germany’s financial institutions to East Germany through a one-to-one currency exchange and the managed privatization of state-owned enterprises. GEMSU was distinct from other market transitions in Eastern Europe in that (1) the restructuring was externally financed by West German fiscal transfers; (2) it installed existing economic institutions (rather than developing new institu tions); and (3) the reforms were rapidly instituted through a “shock therapy” approach (Kaser 1998). 908 Be n to n, McDo n a l D, Ma n z o n i , & Wa r n e r i n So c i a l Fo r c e S 93 (2015) These features helped avoid the “institutional vacuum” that developed in other transitions and also helped to establish a strong bureau cratic state that eased market implementation (Hamm, King, and Stuckler 2012). The East German case allows us to observe changes in labor-market behaviors across periods of rapid transformation and into the stabilization of the institu tional environment. Furthermore, we compare those changes to West Germany, which maintained a stable institutional structure throughout the transitional period. Next, we outline our theoretical perspective by exploring how economic institutions affect job matches, demand-side informality, and how jobmatch patterns are positioned in the wage distribution. Economic Institutions and Network-Based Job Matches Market-transition theory dominates the sociological literature on post-socialist stratification but remains contested (Keister and Borelli 2012). It suggests that transitions from socialist to capitalist economies alter the stratification regime to favor people with market-based resources as opposed to resources in the state redistributive apparatus (Nee 1989, 1996; Nee and Cao 1999). Using the case of the Chinese market transition, Nee (1989) demonstrated how the emer gence of markets set the context for economic actors to earn better income from market-valued resources such as education and entrepreneurship, while political patronage lost its income advantages. Increased income returns to human capi tal occurred in other transition contexts as well, including Hungary (Rona-Tas 1994), Poland (Domanski and Heyns 1995), and Russia (Brainerd 1998). Market-transition theory implies that network-based job matches will decline as labor markets develop to coordinate search and match. As competitive mar kets replace the patronage logic of the command economy, labor-market matches should come to resemble the “disembedded” transactions of idealized markets. Transitions are presumed to reduce actors’ reliance on the traditional patronage systems that reward social resources, such as strong familial connections and political connections to the old communist bureaucracy, and replace these with market relationships. In this frame, markets generate more opportunities for open competition, and formal hiring through advertisements, private employ ment agencies, and other formal labor-market intermediaries. Thus, markets are thought to reduce the use of particularistic criteria. Despite these predictions, findings from longitudinal studies of economic transformation suggest that informal connections continue to play a significant role in the labor market even as socialist economic institutions recede (Gerber and Mayorova 2010; Rona-Tas 1994; Yakubovich 2006). For instance, several studies of the Chinese transition find persistent or increased use of social-capital resources for job finding in both the state sector (Li and Walder 2001; Bian, Shu, Logan 2001) and more broadly (Bian and Huang 2009; Zhao 2013). Scholars working in the market-transition framework do not all agree on what accounts for these divergent outcomes. Roughly, scholars draw on either new institutionalism or corporatism to explore the changing context in transi tion economies (Keister and Borelli 2012). From the new institutionalist per spective, scholars note that market institutions are re c ru i t M e n t, Po s i t i o n, a n D ea s t Ge r M a n Ma r k e t tr a n s i t i o n 909 often not fully formed or may emerge only unevenly. Formal and informal institutions are laws and rules, along with enforcement mechanisms, that structure exchange relationships, reduce transaction costs, and introduce certainty to economic action (Ingram and Clay 2000; North 1990). When these institutions are not fully formed, informal processes flourish. Thus, while market-based transactions may feature prominently in wellestablished and stable institutional environments, transition contexts typically feature extreme uncertainty and high transaction costs that encourage informality.1 Corporatists working within the market-transition framework have pointed to a variety of alternative features that can mediate the effects of markets. Transition pathways vary both within and across countries and are contingent on continuities and discontinuities in political power, state intervention, organizational forms, and historical path dependencies. These determine the kinds of market environ ments that emerge and can alter their implications for stratification and mobil ity. For instance, Walder (1996) argues that variable political institutions “define markets” and manage their impacts. Extending this insight suggests that changing labor markets are contingent not just on market institutions themselves but on other institutions that interact with markets, particularly the state. Corporatists emphasize the factors that complicate transition contexts and might make the for mation of Western-style markets less probable under different conditions. Despite their distinctive emphases, each of these approaches helps advance our understanding of how informal labor-market relations are transformed dur ing market transitions. The institutionalist approach suggests that labor-market actors turn toward social networks during times of institutional uncertainty. The corporatist approach reveals how the uneven development of legitimate insti tutional forms is linked to political power and implementation. These points are particularly relevant for the East German case, where external administra tion (from West Germany) and state capacity offered a unique benefit. By con trast, Chinese reforms (and others) were internally administered and allowed for political cadres to retain sizable power through their social-capital resources (Li and Walder 2001). Consequently, continuity in political power may account for divergent outcomes across different transition contexts. To these insights, we add another: economic transitions fundamentally trans form job-allocation processes in ways that can be understood only by distin guishing between supply-side and demand-side informality. In particular, the institutional uncertainty and increased competitiveness that accompany these transitions have an especially strong impact on how employers use their net work connections to recruit workers. From Supply-Side to Demand-Side Informality The distinction between supplyand demand-side informality pivots on identify ing who activates job matches: workers or employers. Most of the research on informal job finding approaches the issue from the supply side, workers who actively lean on their network contacts for information and referrals (see, e.g., Lin 2001; Mouw 2003; for counterexamples, see Fernandez and Fernandez-Mateo 2006; Marsden 1994; Yakubovich 2006). In part, this emphasis on supply-side job finding has been due to the relative 910 Be n to n, McDo n a l D, Ma n z o n i , & Wa r n e r i n So c i a l Fo r c e S 93 (2015) difficulty in obtaining representative data on employer hiring practices. To overcome this problem, some have used indi vidual-level survey data on the activity/passivity of job searches in order to infer employer recruitment. For example, research on the “non-search” phenomenon in the United States shows that between 25 and 35 percent of currently employed workers found their jobs without engaging in a job search (Campbell and Rosenfeld 1985; Granovetter 1995 [1974]; McDonald and Elder 2006). Research also indicates that non-searching is more prevalent in Germany than in the United States, and these differences are largely consistent with predictions based on the unique labor-market institutions across these contexts (McDonald, Benton, and Warner 2012). Non-searching has long been viewed as a type of network-based job finding because “jobs that ‘fall into your lap’ are unlikely to do so without some personal intermediary” (Granovetter 1995[1974], 145). Moreover, survey data show that the individuals who are most likely to receive unsolicited job leads have the most expansive networks and highest-status job contacts (Lin and Ao 2008). Consequently, non-searching is a useful (if imperfect) indicator of demand-side informal recruitment practices, whereby hiring managers and employees use their social connections to recruit workers to fill job openings. There has been some debate about the extent to which non-searchers were really “not looking” for work as opposed to engaging in some form of passive job search, but research reveals that about 83 percent of non-searchers truly had not engaged in any jobsearch activities and are almost always connected to new jobs through the receipt of unsolicited job leads from friends, relatives, and acquain tances (Granovetter 1995[1974]; Hanson and Pratt 1991; McDonald 2010). Additionally, there are instances where recruitment of workers can be institution alized in seemingly formal ways, as with the use of executive search consultants (“headhunters”) or with institutional linkages between schools and employers (Rosenbaum and Kariya 1989). However, in-depth investigations of executive search consultants reveal practices that are highly dependent on recommendations and personal networks (Finlay and Coverdill 2007). Similarly, school placements are a seemingly institutionalized job-match channel, but these also often involve network-based channels on the part of teachers and instructors (Royster 2003). Consequently, these practices, along with other institutionalized recruitment pro cedures, maintain a veneer of formality that masks a more informal foundation. Differentiating between supplyand demand-side activation is crucial for a thorough understanding of how institutional changes alter the contours of post-socialist labor markets. To date, relatively little is known about how informal recruitment and active networking might be differentially affected by market transitions. Market-transition theory implies that, as neoliberal labor-market institutions emerge and become legitimated, both supplyand demand-side informal matches should decline in prevalence, whereas formal job matches should increase. The shift to capitalist economic institutions generates a mar ket for wage labor, increases competition among workers for jobs (and among firms for workers), and fosters greater opportunities for matching these workers through formal mechanisms (e.g., advertising and employment agencies). re c ru i t M e n t, Po s i t i o n, a n D ea s t Ge r M a n Ma r k e t tr a n s i t i o n 911 However, we argue that the decline in informality should be more dramatic for employer recruitment than for worker search. In many socialist countries—including East Germany (Volker and Flap 1999, 2001), China (Bian 1997), and Russia (Ledeneva 1998)— job finding via patronage ties and informal networks was widespread because it allowed workers and employers to circumvent highly regulated labor-allocation regimes. Among these, informal recruitment was an important hiring channel in the patronage networks known to thrive under state socialism. In Russia, friends and relatives were an especially important channel for finding information about job openings, in many cases without an active search (Clarke 1999, 226). The rise of capitalist labor-market institutions should reduce this patronage logic, transforming many workers from passive beneficiaries of employer patronage into commodified wage laborers actively seeking employment. By contrast, the decline in informal search should be less severe. Access to formal job-finding intermediaries is necessarily uneven, and the gaps in access are likely to be filled by active informal job searches. Searching for jobs via personal connections has few costs and few barriers to access, which is why this form of job finding is frequently associated with workers who are on the fringes of the labor market—young people, immigrants, and the low skilled (Holzer 1996; Kogan 2011; McDonald and Elder 2006). Comparative capitalism research indirectly supports these propositions (Esping-Andersen 1990; Hall and Soskice 2001). Informal job searching is fairly prevalent in both liberal market economies that involve weaker social-welfare policies and greater market-mediated coordination, and in social democratic countries that feature stronger social-welfare states and more non-market centric coordination (Franzen and Hangartner 2006; Pellizzari 2010).2 Alternatively, comparative analyses of informal recruitment are scarce, but a recent study found that non-searching in the US labor market is significantly less prevalent than in Germany (McDonald, Benton, and Warner 2012), which is consistent with the notion that capitalist institutions tend to reduce informal recruitment practices by transforming workers into commodified active searchers. We anticipate that demand-side informality will be quite high immediately following the transition from socialism to capitalism. The immediate reliance on employer networks stems from the increased competitive pressures, the uncer tain institutional context, and the familiarity of the old patronage job-finding regime (cf. Bunce and Csanadi 1993; Gerber and Mayorova 2010; Yakubovich and Kozina 2000). Over time, as institutional uncertainty recedes and market mediation develops, workers should increasingly find work through formal labor-market processes. Thus, we expect that informal recruitment will decline rapidly over time, whereas changes in informal job searching should be more modest. Informal Recruitment and the Wage Distribution In addition to altering the mix of formal/informal job matches, market transi tions also affect the stratification order. Transitions typically introduce labor-supply shortages and skill mismatches, as the labor pool is ill equipped for the changing industrial structure. 912 Be n to n, McDo n a l D, Ma n z o n i , & Wa r n e r i n So c i a l Fo r c e S 93 (2015) Consequently, transitions lead to height ened competition among employers for recruiting highly skilled labor in short supply. In response to these shortages, employer-activated matches (informal recruitment) should be increasingly clustered at the upper end of the wage distribution. Several studies offer implicit support for this proposition and the proposed mechanisms. Pellizzari (2010) analyzed how returns to job matching changed in Italy following the privatization of recruitment agencies. After privatization, employers faced a heightened need to compete for and actively recruit highly skilled labor. In this context, employers placed a stronger premium on network signals and network-based job finding generated greater returns for workers. Similarly, Nee and Opper (2012) find evidence of this trend in the Chinese market-reform context. They describe how network-based recruitment was important for employers facing changing competitive constraints and short ages in highly skilled labor. Employers responded by “developing a diversi fied system of formal and personalized recruitment channels” (Nee and Opper 2012, 168). The employers they studied filled lower-paid and unskilled techni cal or laborer positions through formal channels, like listing with employment agencies, posting advertisements, or relying on direct applications. However, employers filled highly skilled/ high-wage positions, especially in management, through network-based recruitment (Nee and Opper 2012, 170) In general, these findings suggest that market transitions encourage employers to rely on workers’ formal search behavior (i.e., answering advertisements) to fill lower positions while employers activate job matches for highly skilled workers by drawing on their informal connections (i.e., asking acquaintances and employ ees to refer candidates). Additionally, transitions to capitalism may generate greater opportunities for workers to leverage their social connections into economic opportunities (Angelusz and Tardos 2001). Social-network connections are often used in open labor-market environments to circumvent heightened competition and to serve as signals of the underlying quality of job candidates (Erickson 2001; Granovetter 1995[1974]). Previous evidence within the United States suggests that relatively privileged workers are more likely to find jobs through passive recruitment channels (Campbell and Rosenfeld 1985). In particular, “elite non-search” (informal recruitment among highly experienced male workers) is espe cially common and the most economically beneficial in the United States; these non-searchers receive significant wage returns over similarly positioned workers who find their jobs through active formal searches (McDonald and Elder 2006). By contrast, informal job search tends to cluster more among marginalized workers (Loury 2006) and is not typically associated with higher wages (Bridges and Villemez 1986; Mouw 2003; Reingold 1999). We hypothesize that, whereas informal recruitment is likely to decline in prev alence, these practices become increasingly clustered among high-wage workers following transitions from socialism to capitalism. This possibility has received implicit support from previous comparative labor-market research. Informal recruitment (non-search) is significantly more prevalent in Germany than in the United States because the generous re c ru i t M e n t, Po s i t i o n, a n D ea s t Ge r M a n Ma r k e t tr a n s i t i o n 913 German welfare state reduces labor-market commodification and thus the propensity to actively search (McDonald, Benton, and Warner 2012). In the United States, non-searching is rarer but is associ ated with higher wages and employment in managerial occupations. Notably, this parallels our argument that while informal recruitment may become less prominent as economic institutions liberalize, it increasingly clusters among high-wage positions. Rising levels of inequality tend to accompany transitions from state socialism to market capitalism (Bandelj and Mahutga 2010; Heyns 2005)—we posit that the shift toward informal recruitment of well-connected workers is one mechanism driving this growth in inequality. Admittedly, there is a subtle irony to this scenario: in addition to the intended goal of promoting meritand skill-based wage incentives, open labor markets might also result in increased rewards for interpersonal sponsorship. Figure 1 summarizes our empirical expectations concerning how the prevalence and structural location of informal recruitment changed over the course of the former East Germany’s market transition. We explore how economic transitions influence the prevalence of and wages associated with network-based job finding, using the example of German reuni fication and the transformation of East Germany from a command to a market-based economy. Figure 1. The recruitment paradox: Empirical expectations for changing prevalence and distribution to informal recruitment. 914 Be n to n, McDo n a l D, Ma n z o n i , & Wa r n e r i n So c i a l Fo r c e S 93 (2015)