Employee Referrals and Efficiency Wages

By Adriana D. Kugler. Social Science Research Network, 2003

206 citations recorded by the source corpus.

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’ high-paying 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.

Subfields: Economics and Econometrics, Public Administration

View Paper: https://www.semanticscholar.org/paper/ca379357ee7b2ebed72df1161b4774759d942293

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Citations in the corpus

Who Gets the Job Referral? Evidence from a Social Networks Experiment (2012, background): “…and Vishwanath 1994; Galeotti and Merlino 2009), firms can exploit peer monitoring among socially connected employees to address moral hazard (Kugler 2003), and firms can use referrals as a screening mechanism to reduce asymmetric information inherent in the hiring process (Montgomery 1991;…”
Personnel Economics: Hiring and Incentives (2010, background): “Kugler (2003) builds efficiency wages into a model of referrals, and derives an equilibrium in which industries that pay efficiency wages prefer to hire through referral, both because connected workers can engage in peer monitoring and because markets where referrals are important are likely to be…”
Job Referral Networks and the Determination of Earnings in Local Labor Markets (2014, background): “Direct referrals are usually associated with firm-level screening (Kugler 2003; Dustmann et al. 2011), whereas the mechanism proposed in this paper reflects worker opportunism (Bandiera et al. 2009; Beaman and Magruder 2011).”
Do Friends and Relatives Really Help in Getting a Good Job? (2010, background): “Other authors (Kugler (2003), Saloner (1985)) suggest that employed contacts of unemployed workers tend to refer only good applicants because their reputation is at stake and, consequently, less able workers will find it more difficult to get a reference in the first place.”
Social Contacts and Occupational Choice (2004, unknown): “Claudio Michelacci CEMFI c.michelacci@cemfi.es Javier Suarez CEMFI suarez@cemfi.es”
Why the Referential Treatment? Evidence from Field Experiments on Referrals (2016, background): “…information about worker quality, or being referredmay induce a worker to work harder or more productively; alternatively, firms may hire referrals for nepotistic reasons or to decrease recruiting costs (see, e.g., Montgomery 1991; Simon andWarner 1992; Kugler 2003; Wang 2013; Heath 2015).”