Working Paper: CEPR ID: DP3682
Authors: Adriana Kugler
Abstract: 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 the 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 searches provide fewer job and applicant contacts than formal methods (e.g., newspaper ads). In equilibrium, the matching process generates segmentation in the labour 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 the 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.
Keywords: efficiency wage models; interindustry wage differentials; matching models; segmentation; social networks; unemployment
JEL Codes: E24; J41; J63; J64; J68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| employee referrals (M51) | lower monitoring costs (D42) |
| lower monitoring costs (D42) | lower efficiency wages (J31) |
| employee referrals (M51) | lower efficiency wages (J31) |
| peer pressure (C92) | lower efficiency wages (J31) |
| employee referrals (M51) | higher wage premiums in high-wage sectors (J31) |
| employee referrals (M51) | higher wages (J39) |
| referrals (L84) | higher wages (J39) |
| sectoral employment (J68) | higher wages (J39) |