Formal and Informal Recruitment of College Graduates: Policy Implications in West Virginia* Brian Lego, Tesfa Gebremedhin and Kerry Odell

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1 Formal and Informal Recrutment of College Graduates: Polcy Implcatons n West Vrgna* by Bran Lego, Tesfa Gebremedhn and Kerry Odell RESEARCH PAPER Tesfa Gebremedhn Professor, Agrculture and Resource Economcs and Faculty Research Assocate Regonal Research Insttute, West Vrgna Unversty KEY WORDS: recrutment, college graduates, multnomal logt ABSTRACT: A multnomal logt was the prmary econometrc model used to examne the mportance of West Vrgna s hgher educaton nsttutons as a source of sklled employees for the state s prvate sector. The study confrmed that the analyss of descrptve statstcs and emprcal results have numerous applcatons n decson makng and polcy programs. * Selected paper presented at the Southern Agrcultural Economcs Assocaton annual meetng, Fort Worth, Texas, January 28 31, Authors are former graduate research assstant, professor and assocate professor, West Vrgna Unversty. 1

2 FORMAL AND INFORMAL RECRUITMENT OF COLLEGE GRADUATES: POLICY IMPLICATIONS IN WEST VIRGINIA Introducton West Vrgna has undergone sgnfcant economc and demographc transformatons over the past several decades. From the early 20 th century to the 1980s, West Vrgna, n some respects, held a comparatve advantage due to an abundance of a low-cost, unsklled labor force. Resource-dependent, 'blue-collar' ndustres, such as coal mnng, lumber and wood products, and steel manufacturng plants, that reled on lowsklled employment greatly benefted from ths advantage. Wth the advent of the 21 st century, however, ncreasng growth n technologcally orented manufacturng and servce ndustres has ncreased the demand, both state- and natonwde, for a hghly sklled, well-traned, and educated work force. Facng a changng economy that s becomng ncreasngly relant on new technologes may have a negatve effect on regons that lack a work force wth the necessary and approprate sklls to accommodate these changes n specalzed labor demand. Employers n smaller regonal labor markets, such as those n West Vrgna, may fnd t more dffcult to attract qualfed employees wth suffcent sklls and tranng. In addton, the low levels of educatonal attanment of many rural labor markets perpetuates the lack of development because these regons are ll-equpped to satsfy the specalzed needs of prospectve busnesses or exstng busnesses undergong expanson. As a result, these same employers may look toward local hgher educaton nsttutons and techncal schools as sources of a well-traned, hghly sklled, and educated labor force. 2

3 Gven the changng requrements of employers and an ever-ncreasng dependence on technology, the supplers of sklled, college-educated labor must have a more thorough understandng of the mportance employers place on college graduates sklls and abltes. By provdng a more productve workforce, busnesses can potentally augment ther current producton processes, thereby expandng regonal economc actvty. Busnesses recrut graduates from hgher educaton nsttutons because they: (1) provde a major source of professonal, manageral and techncal workers; (2) ncrease effectveness and competton n dynamc busness envronments; and (3) enhance a regon s nternal labor markets (Rynes and Orltzky, 1977). In addton to these benefts, busnesses recrutng graduates from West Vrgna's colleges and unverstes wthn ther regon gve young workers the ncentve to reman n the state. Recently, ths has become a pont of concern for those nvolved n educaton and economc polcy decsons n West Vrgna's State Legslature. Retanng college graduates n the state s expected to provde several benefts to a regon, such as realzng greater returns on nvestments n hgher educaton and ncreasng the state's relatve tax base. Retanng college graduates may also attract new ndustres to locate n the state as the stock of hghly sklled and traned human captal accumulates. Ultmately, several mportant economc polcy questons arse for consderaton by busnesses and polcy makers nterested n the recrutment and retenton of graduates from West Vrgna's hgher educaton nsttutons. The general objectve of ths study was to examne the role of West Vrgna's hgher educaton nsttutons as a source of sklled employees for the state's busness communty. The specfc objectves were to: (1) dscuss the role of colleges/unverstes 3

4 n regonal economc development; (2) evaluate college recrutment by busnesses as an economc polcy; (3) measure the attrbutes of employers on the decson to recrut college graduates; and (4) develop polcy mplcatons based on the emprcal results. Gven the constraned labor markets (sze and qualty) mposed upon employers operatng n West Vrgna, one would expect these busnesses to be less able to attract qualfed employees from both wthn and outsde the regon. Thus, the role of West Vrgna's colleges, unverstes, and techncal schools becomes ncreasngly mportant to the future of the state's economy. Lterature Revew The theoretcal and poltcal nterest n the regonal role of hgher educaton nsttutons n economc development has been on the rse n recent years. Yet, the dayto-day nteracton between colleges and unverstes and ther local regons can be traced back to perods long ago. Areas of research nterest have ncluded local purchase of goods and servces, technology transfer, and the recrutment of graduates as employees (Florax, 1992b). Thus, the college or unversty's mpact on the local regon can be classfed n terms of expendture mpacts or knowledge mpacts. Whle monetary mpacts and technology transfer have been studed qute extensvely through nput-output analyss and other types of regonal modelng, the area concerned wth hgher educaton nsttutons as a source of sklled employees has been often overlooked n the economc context technques (Florax 1992b; Varga, 1997, 1998a, 1998b). Hgher educaton nsttutons and prvate companes nteract n several ways. Examples of nteractons nclude graduates employed by prvate companes, reported research results, and varous types of prvate consultancy. The nteracton process has 4

5 been modeled prmarly through a spatal dffuson functon ntroduced by Hagerstrand (1965; 1967). These dffuson processes can be regarded as herarchcal or contagous n nature. At the hghest level of contagon, the dffuson of knowledge s concentrated wthn the vcnty of the orgnatng source and decays strongly wth dstance. In the herarchcal case, knowledge dffuses at frst nstance among central places, prmarly the nsttuton's surroundng regon, and at a later stage t successvely trckles down to places of lower order, smlar to resonatng rpples on the surface of water. The dffuson among places of hgher order may be expected to be faster than among places of lower order, snce the former have greater access to the knowledge nfrastructure. Furthermore, places hgher n the herarchy are connected to the prmary transportaton and communcaton networks and they have n general a better-educated workforce (Florax, 1992b; Van Djk and Folmer, 1986). Ultmately, the most lkely meda through whch technology transfer would occur s through the formal recrutment of college graduates. Ths s partcularly evdent n smaller regonal labor markets because employers may fnd t more dffcult to attract qualfed employees wth suffcent sklls and tranng through nformal technques, such as word-of-mouth and local newspaper advertsements. As a result, many busnesses faced wth an nsuffcent level of local labor supply n techncal and professonal felds are now consderng hgher educaton nsttutons and techncal schools as sources of a well-traned, hghly sklled, and educated labor force. The lack of economc development s perpetuated n rural areas because low levels of educatonal attanment, and thus poor occupatonal moblty, have left many rural areas unable to satsfy the needs of prospectve busnesses or busnesses undergong expanson engaged n actvty 5

6 non-tradtonal to rural areas (McGranahan and Ghelf, 1991). Gven the constrant placed upon employers n solated rural labor markets, formal recrutment must go well beyond newspaper advertsements and help wanted sgns. If these busnesses expect to compete wth ther counterparts n urbanzed areas, hgher educaton nsttutons must be utlzed as a source of recruted labor. However, the role of unverstes and colleges n provdng sklled and educated recruts to busnesses n the regon, and ultmately the health of the regon's economy, has been overlooked. So far, there are no studes that address the mportance of ths ssue. Whle ths research examned the attrbutes of the frms recrutng labor from colleges and unverstes, mplcatons for regonal economc development are also offered. Methodology Conceptual Framework One of the most mportant objectves of busness's decson to nvest n human captal s to realze a net gan n busness productvty, and ultmately maxmzng the present value of labor servces provded by a new employee. Ths functon, n turn, depends on the labor demand the frm faces subject to varous resource constrants arsng from the new employee's expected wage rate, net-tranng costs, and tme devoted to recrutment. Gven that formal recrutment technques employ a formal market ntermedary, n ths case a college or unversty, employers must target a specfc pool of applcants whle also competng wth other employers n tghter labor markets (Fevre 1989; Lndeboom et al., 1994). Informal technques, however, can often beneft frms by potentally maxmzng job match wth the recrut and reducng the resource costs assocated wth screenng and addtonal personnel costs. Thus, the choce of recrutment 6

7 for college graduates (formal, nformal, or no recrutment) can be represented by a random choce utlty model contngent upon the attrbutes and further subject to varous resource constrants, dstance, and local labor market characterstcs. The basc model s based upon each frm's utlty of the choce of recrutment technque. The regonal labor market where the th frm s located s assumed to contan a fxed number of frms, wth each frm requrng a specfc occupatonal-educatonal mx. Therefore, frms are not assumed to have homogeneous demand for specfc levels of educatonal requrements. In addton, each frm assumed to face a downward slopng labor demand curve wth a fxed supply of college-educated labor. Thus, the frm's choce of recrutment technque s expected to maxmze the present value of labor servces provded by new employees (Mencken and Wnfeld, 1998; Barron and Bshop, 1985). The model presented n Russo et al. (1996) to represent the dstrbuton of a frm's recrutment choce n terms of a condtonal probablty, p. The model has the followng structure: ( φ, γ) = p( φ γ) p( γ) p 1.1 where γ s the type of recrutment technque selected. The frst probablty on the rghthand sde of Equaton (1.1) descrbes the recrutment procedure,.e. the ntervew, selecton process, and the outcome of tranng. The second probablty concerns the choce of recrutment technque and, consequently, of the constrants faced by the frm. Ths porton of the dstrbuton functon wll generally affect the avalablty of college or unversty graduates. Ths choce wll affect the supply and characterstcs of graduates 7

8 who come forth, as dfferent channels can reach dfferent segments of the populaton. Ths study wll not examne the frst probablty of the rght-hand sde of Equaton (1.1), and hence the results must be consdered condtonal on the choce of the recrutment technque and resource constrants. In the current context, the recrutment of college graduates must be consdered a dffuson or transfer of knowledge (Florax, 1992b). Frms recrut specfc ndvduals under the assumpton that busness wll be postvely affected from the tranng and educaton these potental employees have receved from ther respectve post-secondary nsttutons. One would expect those frms further n dstance from hgher educaton nsttutons would be less lkely to recrut from that nsttuton. Thus, the demand for college graduates wll declne geometrcally as the dstance from a college/unversty s greater. Therefore, the frm's spatal demand for college graduates can be represented by: R r = 1 rr CGr Dr =, r = rr = d ( 1,, r,, R), d = 1for r r Where D r represents the th frm's demand for college graduates n regon r, and CG r' denotes the avalablty of graduates by a college or unversty n regon r'. The varable, d rr', s the dstance from the college or unversty n regon r' to the frm n regon r. Dstance from the central labor pool s not the frm's sole reason for selectng a specfc recrutment method. In general, one would expect an employer to choose formal over nformal recrutment on the amount of resources avalable. Thus, the frm's choce model, contngent on ts avalable resources, s 1.2 max s. t. U* = U x * j + ω ( C, x ) 0 j 0 j t ωt f ( t) dt C0 R * 1.3 8

9 The frm s assumed to maxmze expected utlty from the specfc recrutment choce. The constrants faced by the frm nclude x*, whch denotes the expected net present value of non-recrutment costs and R* represents the establshment's expected net present value of revenue attrbuted to the new employee. The term, ω 0, stands for ntal recrutng costs whle ω t represents the potental employee's wage functon, from hrng to perhaps retrement. The densty functon for the potental employee's length of stay n hs or her expected poston s f(t), snce many employees do not reman n the same poston for ther entre careers. Ultmately, based on the nformaton presented above, a more general case can be presented where a busness's choce of recrutment method s subject to a group of local labor market characterstcs, frm demographcs, and dstance to hgher educaton nsttutons. Ths model can be wrtten as: Uj = β z + Γ x + ε 1.4 j j j where z j s a matrx of employer-specfc characterstcs, such as establshment age, number of employees, educatonal attanment of employees. The matrx x j contans varables that nclude regon-specfc characterstcs dentfyng the sze of the local labor market and dstance to the nearest hgher educaton nsttuton. The matrces, β' and Γ', contan parameters that determne the effects of the changes n each varable on the predcted choce. The theoretcal model can be estmated usng the avalable data, but changes must be made to the functonal form to accommodate the types of nferences requred by ths research. 9

10 Model Specfcaton An employer's choce of recrutment from colleges and unverstes depends upon ts demographcs, resource avalablty, dstance to hgher educaton nsttutons, and regonal labor market characterstcs. Ths type of model s consdered dscrete n nature, snce the dependent varable s allowed only to take on values that correspond to a choce of recrutment method,.e. formal, nformal, or none. Ultmately, the model can be expressed as the probablty of a frm selectng a specfc recrutment technque subject to the frm's demographcs and regonal labor market characterstcs. If a frm supposed to choose recrutment method j, t s assumed that the utlty, U j, from makng the choce s the maxmum among the J possble utltes. Hence, the statstcal model s drven by the probablty that recrutment method j s made, whch s Prob If C s let to be a random varable ndcatng the choce of recrutment method made, McFadden (1973) has shown that f (and only f) the J dsturbances are d wth a Webull ει dstrbuton F( ε ) ( e ) j ιj ( U U ) for all other k j. j = exp, then > 1.5 k Prob ( C = j) = e 2 k = 0 β x e j β x k 1.6 A theoretcal random choce model for the employer's selecton of recrutment technque was presented n the prevous secton. Recallng from Equaton 1.4, the frm's selecton of recrutment method for college graduates was based on characterstcs not 10

11 only related to the frm, but also the regon. The econometrc model specfed for ths study s specfed n multnomal logt form and can be wrtten n equaton form as P2 log P 1 P3 log P 1 = α = α β + β LM LM Although not necessary, statements for log( P P ) γ + γ ES ES + δ + δ OR OR 2 + θ ED + λ TT + φ YR can be derved from the above 21 + θ ED + λ TT + φ YR equatons usng algebrac manpulatons. The left hand sde varables represent the logodds of the probablty a frm wll select one method of recrutng a college graduate over another. Therefore, the parameters,, (,, 2, 8, and Ν represent the effect of the changes n each varable on the logarthm of the ratos of the predcted probabltes,.e. the change n probablty of recrutment method selected attrbuted by some varable, say establshment sze. In order to gauge the mportance of West Vrgna's colleges and unverstes n provdng sklled, educated labor to West Vrgna's employers n the publc and prvate sector, a survey nstrument was used as the source of prmary data collecton. The survey's sample conssted of a stratfed random sample of publc and prvate employers n the state of West Vrgna beleved to be engaged n the recrutment of college graduates. The sample was arranged nto separate strata on the bass of county of locaton and 4-dgt SIC code to meet the geographc representaton and ndustry-level specfcatons. The source of the busnesses and samplng frame came from the West Vrgna Bureau of Employment and Labor Statstcs Program whch had the knowledge and expertse n admnsterng busness surveys for unemployment nsurance and 11

12 occupatonal classfcaton data. Results and Analyss Accordng to Table 1, only 50.4 percent of respondents ndcated that they utlze formal campus recrutment actvtes. Thrty-sx percent ndcated that they only used nformal college graduate recrutment methods, whle 13.4 percent ndcated that they do not need to recrut college graduates snce a hgh school degree or equvalency s the mnmum requrement for employment. Employers located n Monongala County were the most lkely (30%) to use formalzed recrut methods to recrut college graduates, whle the servces ndustry was lsted as the sample's largest formal recruter of college graduates (80%). Thrty percent of respondents, however, ndcated that they were not satsfed wth ther recrutment actvtes on college campuses; the most common response (10 out of 18) for dssatsfacton wth the qualfcatons of potental employees. Table 1 also presents the summary statstcs for each ndependent varable by the classfcaton of college graduate recrutment method ndcated on the survey. Frms engaged n formal campus recrutment actvtes are substantally larger than those who only use nformal recrutment methods or no type of college recrutment at all. For example, the sample's average frm sze for employers recrutng college graduates through formal campus actvtes was 271, compared to 29 for those usng nformal recrutment, and 16 for those not recrutng college graduates va any method. Employers formally recrutng college graduates are expected to have a hgher percentage of employees wth at least a 4-year degree than employers usng nformal methods or none at all. 12

13 Table 1: Descrptve Statstcs of Dependent and Independent Varables Formal Recrutment Informal Recrutment No Recrutment (n=61) (n=43) (n=15) Varable Name Mean Medan Std. Dev. Mean Medan Std. Dev. Mean Medan Std. Dev. Establshment sze Populaton 52,421 45,252 34,272 42,847 40,135 32,145 39,955 43,045 27,358 Years at locaton Tme to unversty Workers w/ degree (%) Outsde of regon (%) Note: Populaton data come from U.S. Census Bureau, Populaton Estmates Dvson < 13

14 The general results of the model ndcate that the ft of the model s good, despte the cross-sectonal nature of the data. The model acheved a maxmzed log-lkelhood functon, convergng after eght teratons of Newton's search method. In order to test the overall ft of the model, one must use the restrcted log-lkelhood, whch tests the null hypothess that all of the slope coeffcents are jontly zero. If the null hypothess s rejected at a specfed p-value, then one has to conclude that at least one parameter s sgnfcant. Accordng to Table 2, the null hypothess of each coeffcent jontly equalng zero at the 1-percent level must be rejected. The coeffcent estmates ndcate that the number of workers brought nto a regon to take employment and the proporton of employees wth college degrees are the only coeffcents that are sgnfcant across dfferent types of recrutment methods. Interestngly enough, however, relatve to frms that do not recrut college graduates, a 1 percent ncrease n the employees holdng a college degree reduces the odds of recrutng through nformal methods by a factor of 0.98 (or 2 percent decrease), whch s a very small change. As expected, formal recrutment of college graduates s most greatly affected by the sze of the establshment, populaton of the surroundng regon, the proporton of workers wth college degree, and the percentage of workers comng from outsde the regon. Travel tme to unversty and number of years at current locaton were not sgnfcant n ether logt equaton. Accordng to the spatal dffuson theory, frms located n regons n close proxmty to a college or unversty are expected to be more lkely to recrut graduates of those same nearby nsttutons, such as those n West Vrgna, due to ther greater exposure to local communcaton networks. 14

15 Table 2: Multnomal Logt Regresson Results Informal Recrutment (Y=2) Formal Recrutment (Y=3) Varable Coeffcent T-statstc Coeffcent T-statstc Intercept * Populaton * Establshment Sze *** Years at locaton Tme to unversty Workers w/ degree * ** Outsde of regon ** * Restrcted Log Lkelhood Ch-Squared Statstc Sgnfcance Level Note: *sgnfcant at 10% level; **sgnfcant at 5% level; ***sgnfcant at 1% level; However, wth the ncreasng utlzaton of the nternet for job-postng webstes, jobs can now be advertsed at a relatvely low cost whle stll recevng a large pool of qualfed applcants. Therefore, busnesses located n relatve solaton from colleges and unverstes n West Vrgna can afford not to rely on recrutng (formally or nformally) college graduates from ther home state. Ths stuaton s partcularly mportant for those busnesses that responded as beng dssatsfed wth ther past success of recrutment actvtes at West Vrgna's colleges and unverstes, ether through a smple lack of qualfed applcants or total dssatsfacton wth applcants' experence or qualfcatons. Hence, the results cannot reject the hypothess that establshments operatng n labor markets closer to colleges and unverstes are more lkely to use formal or nformal recrutment relatve to establshments not recrutng college graduates at all. 15

16 The frst logt equaton, whch compares the log-odds of recrutng college graduates nformally versus those who do not recrut college graduates at all, provdes an nterestng comparson of these two groups. Wth the exceptons of establshment sze and the percentage of employees wth a degree, the sample means n each group were farly smlar. Thus, the emprcal model was not able to fnd a statstcally sgnfcant dfference n the probablty of choosng nformal recrutment technques over no form of college graduate recrutment, wth the excepton of those varables lsted above. Conclusons Whle busnesses n West Vrgna are engaged n actve recrutment of graduates from the state's hgher educaton nsttutons, many employers appear to be more convnced of the success from usng old-fashoned recrutment technques, such as wordof-mouth and newspaper advertsements. Wth ncreased use of technology and as rural labor markets become less constraned by such tradtonal problems as access to nformaton, the graduates from West Vrgna's colleges and unverstes wll play a more vtal role n the transfer of new technologes, as well as more effcent producton processes, new management technques, and new deas. The avalablty of locally traned and educated labor s essental for many employers because t provdes several benefts to the regon. Frst of all, recrutng college graduates from colleges and unverstes n a rural state lke West Vrgna prevents leakages of tax dollars spent on hgher educaton, allowng regons to realze a return on ther nvestments n educaton. Secondly, the avalablty of an educated labor supply can ncrease the productvty of the local economy, thereby expandng the potental prospects for future economc development. Thrd, and perhaps most 16

17 mportantly, busnesses engaged n recrutment of labor from colleges and unverstes may reduce future transacton costs n artculatng the supply and demand for hghly sklled, well-traned and educated labor force. Based on the results of ths survey study, employer's utlzng formal college graduate recrutment technques are, on average, more sgnfcantly related to a larger local labor market, larger establshment sze, and the number of employees holdng a 4- year college degree. In addton, the number of workers brought nto a regon to take employment and the proporton of employees wth college degrees are the only coeffcents sgnfcant to the probablty of predctng that a frm chooses formal or nformal recrutment methods. Interestngly enough, however, frms wth a greater number of employees holdng a college degree are less lkely to choose nformal college graduate recrutment over no recrutment. Proxmty to a college or unversty and the number of years at the frm's current locaton were nsgnfcant n both logt equatons. There s evdence that technology has created a 'natonalzaton' and 'globalzaton' of local labor markets has mproved the flow of nformaton to those operatng n rural areas. The growth of non-tradtonal recrutng tools, such as the nternet, that reach a very wde net of potental recruts have mproved many employers' chances of locatng sutable prospects. In addton, the emprcal results provded no conclusve evdence that a frm's socal network, measured by years at the current locaton, affected the probablty that a frm wll choose formal on-campus recrutment actvtes or nformal off-campus actvtes over no recrutment of college graduates. 17

18 The results from ths study may shed a lght on several ssues. Frst, frms n less populated areas are more lkely to follow ther own formula when t comes to fllng a job vacancy. Although these technques may have proven useful n the past, current knowledge tells us that technologcal nnovatons are becomng more and more wdespread, encompassng ndustres not generally accustomed to these changes. Thus, provdng these busnesses wth the qualty of sklled and educated labor they need to move forward n ths century becomes an ncreased responsblty of West Vrgna's colleges and unverstes. Furthermore, wth ncreasng controversy over the mportance of West Vrgna's hgher educaton nsttutons for practcal ssues such as workforce development, the ssue of provdng sklled and educated labor becomes more mportant than ever. By supplyng busnesses wth graduates possessng the proper balance of sklls, educaton, and work ethc, West Vrgna's hgher educaton nsttutons wll accomplsh ther msson statements of promotng the economc development and well beng of the state's economy and ts ctzens. 18

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