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

42 Pages Posted: 17 Jan 2020 Last revised: 10 Apr 2020

See all articles by Lukas Bolte

Lukas Bolte

Stanford University - Department of Economics

Nicole Immorlica

Microsoft Research

Matthew O. Jackson

Stanford University - Department of Economics; Santa Fe Institute

Date Written: January 1, 2020

Abstract

We study labor markets in which firms can hire either via referrals or open applications. Referrals help screen candidates and so lead to better matches and increased productivity, which disadvantages workers who apply via open applications. This disadvantage is exacerbated by a ``lemons'' effect: some open applicants have been rejected for jobs via referrals. We identify the different conditions under which concentrating referrals among some group lowers overall productivity and also raises inequality within a generation, and immobility across generations. We use the model to examine optimal policies, including the long-term impact of different forms of affirmative action, as well as how the possibility of firing workers improves hiring decisions and lowers inequality.

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

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

Suggested Citation

Bolte, Lukas and Immorlica, Nicole and Jackson, Matthew O., The Role of Referrals in Inequality, Immobility, and Inefficiency in Labor Markets (January 1, 2020). Available at SSRN: https://ssrn.com/abstract=3512293 or http://dx.doi.org/10.2139/ssrn.3512293

Lukas Bolte

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

Nicole Immorlica

Microsoft Research ( email )

One Memorial Drive, 14th Floor
Cambridge, MA 02142
United States

Matthew O. Jackson (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
1-650-723-3544 (Phone)

HOME PAGE: http://www.stanford.edu/~jacksonm

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

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