The Value of Hiring Through Referrals

65 Pages Posted: 18 May 2013

See all articles by Stephen V. Burks

Stephen V. Burks

University of Minnesota, Morris - Division of Social Science; Institute for the Study of Labor (IZA); Center for Decision Research and Experimental Economics (CeDEx); Center for Transportation Studies, University of Minnesota

Bo Cowgill

Columbia University - Columbia Business School

Mitchell Hoffman

University of Toronto - Rotman School of Management; National Bureau of Economic Research (NBER)

Michael Gene Housman

University of Pennsylvania - Health Care Systems Department

Multiple version iconThere are 2 versions of this paper

Abstract

Employee referrals are a very common means by which firms hire new workers. Past work suggests that workers hired via referrals often perform better than non-referred workers, but we have little understanding as to why. In this paper, we demonstrate that this is primarily because referrals allow firms to select workers better-suited for particular jobs. To test our model, we use novel and detailed productivity and survey data from nine large firms in three industries: call-centers, trucking, and high-tech (software). Referred workers are 10-30% less likely to quit and have substantially higher performance on rare "high-impact metrics" (e.g. creating patents and avoiding truck accidents), despite having similar characteristics and similar performance on non-rare metrics.To identify the source of these behavioral differences, we develop four new statistical tests, all of which indicate that firms benefit from referrals predominantly by selecting workers with a better fit for the job, as opposed to referrals selecting workers with higher overall quality; to referrals enabling monitoring or coaching; or to it being more enjoyable to work with friends. We document that workers refer others like themselves, not only in characteristics but in behavior (e.g. unsafe workers refer other unsafe workers), suggesting that firms may gain by incentivizing referrals most from their highest quality workers. Referred workers achieve substantially higher profits per worker and the difference is driven by referrals from high productivity workers.

Keywords: referrals, productivity, worker selection, innovation, patents, cognitive ability, non-cognitive ability, job testing, call centers, high-tech, software, trucking, truck accidents

JEL Classification: M51, J24, O32, J63, L84, L86, L92

Suggested Citation

Burks, Stephen V. and Cowgill, Bo and Hoffman, Mitchell and Housman, Michael Gene, The Value of Hiring Through Referrals. IZA Discussion Paper No. 7382, Available at SSRN: https://ssrn.com/abstract=2266809

Stephen V. Burks (Contact Author)

University of Minnesota, Morris - Division of Social Science ( email )

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HOME PAGE: http://www.morris.umn.edu/academics/truckingproject/

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Center for Decision Research and Experimental Economics (CeDEx) ( email )

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Center for Transportation Studies, University of Minnesota ( email )

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Bo Cowgill

Columbia University - Columbia Business School ( email )

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Mitchell Hoffman

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Michael Gene Housman

University of Pennsylvania - Health Care Systems Department ( email )

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Philadelphia, PA 19104-6358
United States
215-681-6955 (Phone)

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