The Role of Referrals in Immobility, Inequality, and Inefficiency in Labor Markets

Abstract

We study the consequences of job markets' heavy reliance on referrals. Referrals screen candidates and lead to better matches and increased productivity, but disadvantage job-seekers who have few or no connections to employed workers, leading to increased inequality. Coupled with homophily, referrals also lead to immobility: a demographic group's low current employment rate leads that group to have relatively low future employment as well. We identify conditions under which distributing referrals more evenly across a population not only reduces inequality but also improves future productivity and economic mobility. We use the model to examine the short and long run welfare impacts of policies such as algorithmic fairness and affirmative action. We also examine how macroeconomic conditions as well as the possibility of firing workers change the effects of referrals.

Keywords: Inequality, Immobility, Job Contacts, Job Referrals, Social Networks, Networks, Productivity, Affirmative Action, Labor Market Rigidity

JEL Classification: D85, D13, L14, O12, Z13