published in: Labour Economics, 2003, 10 (5), 531-556
Many workers believe that personal contacts are crucial for obtaining jobs in high-wage
sectors. On the other hand, firms in high-wage sectors report using employee referrals
because they help provide screening and monitoring of new employees. This paper develops
a matching model that can explain the link between inter-industry wage differentials and use
of employee referrals. Referrals lower monitoring costs because high-effort referees can
exert peer pressure on co-workers, allowing firms to pay lower efficiency wages. On the other
hand, informal search provides fewer job and applicant contacts than formal methods (e.g.,
newspaper ads). In equilibrium, the matching process generates segmentation in the labor
market because of heterogeneity in the size of referral networks. Referrals match ‘good’ highpaying
jobs to well-connected workers, while formal methods match less attractive jobs to
less-connected workers. Industry-level data show a positive correlation between industry
wage premia and use of employee referrals. Moreover, evidence using the NLSY shows
similar positive and significant OLS and fixed-effects estimates of the ‘returns’ to employee
referrals, but insignificant effects once sector of employment is controlled for. This evidence
suggests referred workers earn higher wages not because of higher unobserved ability or
better matches but rather because they are hired in high-wage sectors.
We use cookies to provide you with an optimal website experience. This includes cookies that are necessary for the operation of the site as well as cookies that are only used for anonymous statistical purposes, for comfort settings or to display personalized content. You can decide for yourself which categories you want to allow. Please note that based on your settings, you may not be able to use all of the site's functions.
Cookie settings
These necessary cookies are required to activate the core functionality of the website. An opt-out from these technologies is not available.
In order to further improve our offer and our website, we collect anonymous data for statistics and analyses. With the help of these cookies we can, for example, determine the number of visitors and the effect of certain pages on our website and optimize our content.