Explaining the U-Shape of the Referral Hiring Pattern in a Search Model with Heterogeneous Workers

31 Pages Posted: 26 Jun 2014 Last revised: 5 Dec 2014

See all articles by Yuliia Stupnytska

Yuliia Stupnytska

Bielefeld University - Department of Business Administration and Economics

Anna Zaharieva

Bielefeld University - Department of Business Administration and Economics

Date Written: June 13, 2014

Abstract

This paper presents a search model with heterogeneous workers, social networks and endogenous search intensity. There are three job search channels available to the unemployed: costly formal applications and two costless informal channels - through family and professional networks. The gain from being employed is increasing in the productivity, so the lowest motivation for preparing formal applications is proved to be among the least productive worker types. We assume that professional contacts exhibit a strong degree of homophily, thus it is profitable for firms to direct their network search towards the more productive incumbent employees. So the probability of a professional referral is increasing in the productivity of the worker, which mitigates the incentives to use the formal channel of search. Therefore, the model predicts that workers in the right (left) tail of the productivity distribution have the highest propensity of finding a job with a help of professional (family) contacts, whereas the formal channel of search is mostly utilized by workers in the middle range of the distribution. This explains the U-shaped referral hiring pattern in the model. The endogenous sorting of workers across channels also implies that professional (family) referrals are associated with wage premiums (penalties) compared to the formal channel of search. The average effect of referrals on wages is, however, ambiguous and depends on the relative proportions of high and low productivity types in the population. These findings help to explain the contradicting empirical evidence concerning the effect of referrals on wages.

Keywords: endogenous search intensity, family contacts, professional networks, U-shape, referral puzzle, wage premiums and penalties

JEL Classification: J23, J31, J38, J64

Suggested Citation

Stupnytska, Yuliia and Zaharieva, Anna, Explaining the U-Shape of the Referral Hiring Pattern in a Search Model with Heterogeneous Workers (June 13, 2014). Institute of Mathematical Economics Working Paper No. 511, Available at SSRN: https://ssrn.com/abstract=2458915 or http://dx.doi.org/10.2139/ssrn.2458915

Yuliia Stupnytska

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Anna Zaharieva (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

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