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

64 Pages Posted: 17 Jan 2020 Last revised: 12 Aug 2022

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 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 optimal policies, showing that one-time affirmative action policies involve short-run production losses, but lead to long-term improvements in equality, mobility, and productivity due to induced changes in future referrals. We also examine how macroeconomic conditions as well as the possibility of firing workers changes 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

Suggested Citation

Bolte, Lukas and Immorlica, Nicole and Jackson, Matthew O., The Role of Referrals in Immobility, Inequality, 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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