This is something that can potentially trigger an interesting conversation the next time a professional head-hunter calls you

In the US, inequality in income distribution has nearly doubled since the year 1970.

1. The top 1% wage share rose from 5.1% in 1970s to 10.9% in 2010 in the US, while it was around 6-7% in France over the whole period
2. The top 10% share increased from 25.7% to 34.5% in the US and stayed around 25-27% in France.

And if Alexey Gorn, a researcher at Bocconi University in Milan, Italy, is to be believed; this bears a direct correlation with the simultaneous rise of professional recruitment firms. He discussed this extensively in a paper titled, The Role of Head-hunters in Wage Inequality: It’s All about Matching [1]published on February 11, 2016

The top 1 % of earners in the U.S. made 11 %of the nation’s wages in 2010, compared with 6 %in 1978, according to economist Thomas Piketty, author of the 2013 bestseller \”Capital in the Twenty-First Century.\” Gorn\’s research finds that countries in Europe that have become more exposed to the work of recruitment firms show similar patterns.

Cor-relation between income inequality and the rise in fortunes of the recruitment industry

So Alexey Gorn has essentially established a correlation between income inequality and the rise in fortunes of the recruitment industry, which has increased from $5 billion in 2004 to $10.6 billion in 2013 worldwide

Winners take it all

To determine the impact head-hunters might have on wage inequality, Gorn developed a model based on U.S. labor-market features in the 1970s and 2010s.

It incorporates the main features of headhunter industry in a standard labor market framework a la Diamond-Mortensen-Pissarides.

According to his calculations, the introduction of head-hunters leads to a significant shift of high-skilled personnel toward the most productive firms. Likewise, less-productive firms have lost top workers, and less-skilled laborers have forgone a shot at the best-paying jobs.

Where head-hunters score

The fact remains that head-hunters have better information about a worker’s skill level and that they can approach workers who are not actively searching for a (new) job at this moment allows for better screening of workers and reduces labor market frictions in the top part of the wage distribution

In other words, the headhunter channel allows to separate high-skilled workers reducing frictions for them and providing them with exclusive opportunity to work in high productive firms.

The presence of this channel changes the distribution of the workers over the wages.

Distribution of wages without headhunter channel

Without headhunter channel the distribution has a peak close to minimal possible wage and then decreases, having a form close to Pareto

Distribution of wages with headhunter channel

With the headhunter channel, the distribution still has similar form but has a fatter right tail

Because of worker skill and firm productivity complementarities the wages of workers hired through head-hunters increase more than proportionally to the rest of the workers. Thus, the presence of head-hunters generate a fat tale of the wage distribution with a larger wage share of the top 1% and 10% workers.

So, the headhunter channel generates the fat tail of the wage distribution in this model.

Explanation

Without headhunter channel, the probability of matching a high-skilled worker with a high-productive firm is lower than matching a high-skilled worker with a low-productive firm (due to the fact that there are relatively few high-productive firm)

So there will be larger shares of high-skilled workers working in low-productive firms and low-skilled workers in high productive firms.

Because of skill complementarities, wages of low-skilled workers are lower than wages of high-skilled workers in the same type of firm.

And because only some high-productive firms will be matched with high-skilled workers there will be a small mass of workers getting very high wages.

When, instead, there is a possibility to hire only high-skilled workers through the headhunter channel, high-productive firms will be matched only with high-skilled workers and all of them will receive relatively high wages; this corresponds to the fat tail of the distribution.

Thus, head-hunters cause separation of the labor markets for high-paying and low-paying jobs.

With the headhunter channel in place, only high-skilled workers get to high-paying jobs and their wages increase dramatically due to skill and firm productivity complementarities.

Moreover, headhunter channel allows high-skilled workers to search on-the-job less costly because they don’t have to pay the search cost every period but only when they receive a call from the headhunter.

Because of this, high-skilled workers agree to consider an offer even when they work in medium and high productive firms, while they would stop searching for a job actively working in such firms without the headhunter channel.

Low-skilled workers, in contrast, lose their possibility to work in high-paying jobs, therefore their wages are compressed to lower levels after the introduction of the head-hunters.

Summing Up

As per this study , at least 40% of top earners’ wage growth can be traced back to head-hunters offering exclusive opportunities to high-skilled workers at the best firms—along with a pay cheque that less-well trained people won’t ever see.

When there is a possibility to hire only high-skilled workers through the headhunter channel, high-productive firms will be matched only with high-skilled workers and all of them will receive relatively high wages

 

 

1] https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=EEAESEM2016&paper_id=1093