The Role of Referrals in Inequality, Immobility, and Inefficiency in Labor Markets
42 Pages Posted: 17 Jan 2020 Last revised: 10 Apr 2020
Date Written: January 1, 2020
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
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