The Role of Referrals in Inequality, Immobility, and Inefficiency in Labor Markets
50 Pages Posted: 17 Jan 2020 Last revised: 24 Jun 2020
Date Written: January 1, 2020
We study labor markets in which firms can hire either via referrals or open applications. Referrals screen candidates and lead to better matches and increased productivity, but disadvantage workers who apply via open applications. We identify conditions under which distributing referrals more evenly across a population not only reduces inequality, but also increases productivity and also improves economic mobility across generations. We use the model to examine optimal policies, showing that one-time affirmative action policies have long-term impacts due to induced changes in future referrals. We also show how the possibility of firing workers improves hiring 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
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