The Role of Referrals in Inequality, Immobility, and Inefficiency in Labor Markets
25 Pages Posted: 17 Jan 2020
Date Written: January 1, 2020
Labor markets rely on a combination of referrals and open applications in hiring. Referrals help screen candidates and so lead to better matches and increased productivity; but also give referred workers a relative advantage, and hence can lead to inequality. We examine how these different sources of hiring interact, and how that interaction determines inequality within a generation, immobility across generations, as well as the overall productivity of a society. We show that open applicants suffer from a “lemons” effect: some are applying after being rejected for jobs via their referrals. This lemons effect lowers the value of hiring through open applications and makes referred candidates look even relatively more attractive, further disadvantaging applicants without referrals. As a result, inequality in referrals, due to historic employment rates or imbalances in referral rates across groups, ties fates together across a group’s generations resulting in immobility as well as inequality within a generation. Concentrating referrals among a subpopulation can also lower productivity. We show how these all interact, and identify the different conditions under which concentrating referrals among some group raises inequality, immobility, and/or lowers productivity. We show how characterizing these effects depends on understanding the lemons effect, and also examine extensions of the model that include the possibility of firing workers, as well education choices by workers.
Keywords: Inequality, Immobility, Job Contacts, Job Referrals, Social Networks, Networks, Productivity
JEL Classification: D85, D13, L14, O12, Z13
Suggested Citation: Suggested Citation