The Role of Referrals in Immobility, Inequality, and Inefficiency in Labor Markets
58 Pages Posted: 17 Jan 2020 Last revised: 21 Mar 2021
Date Written: January 1, 2020
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 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: Suggested Citation