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Labor markets with endogenous job referral networks: Theory and empirical evidence

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  • Schmutte, Ian M.

Abstract

This paper develops a model of frictional job search in which job referral networks evolve endogenously in response to local labor market conditions. An intuitive “Network Balance” condition characterizes the equilibrium density of the job referral network. The model helps explain observed counter-cyclical movements in referral-based search, and shows that endogenous referral networks may amplify labor market shocks. It also implies that the use of referrals by others limits the effectiveness of referral-based search. I find support for this prediction using data from the Cornell National Social Survey. The data show workers are less likely to find jobs through referral in markets where referrals are more widely used.

Suggested Citation

  • Schmutte, Ian M., 2016. "Labor markets with endogenous job referral networks: Theory and empirical evidence," Labour Economics, Elsevier, vol. 42(C), pages 30-42.
    • Handle: RePEc:eee:labeco:v:42:y:2016:i:c:p:30-42
    DOI: 10.1016/j.labeco.2016.06.005
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    Cited by:

    1. Tenev, Nicholas H, 2020. "Social Connections and Racial Wage Inequality," SocArXiv vm82w, Center for Open Science.
    2. Moreno Galbis, Eva & Wolff, Francois-Charles & Herault, Arnaud, 2020. "How helpful are social networks in finding a job along the economic cycle? Evidence from immigrants in France," Economic Modelling, Elsevier, vol. 91(C), pages 12-32.
    3. Horvath, Gergely & Zhang, Rui, 2018. "Social network formation and labor market inequality," Economics Letters, Elsevier, vol. 166(C), pages 45-49.
    4. Ian Schmutte, 2016. "How do social networks affect labor markets?," IZA World of Labor, Institute of Labor Economics (IZA), pages 304-304, October.
    5. Eliason, Marcus & Hensvik, Lena & Kramarz, Francis & Nordström Skans, Oskar, 2017. "The causal impact of social Connections on firms' outcomes," Working Paper Series 2017:11, IFAU - Institute for Evaluation of Labour Market and Education Policy.

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