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Employee Referrals and Efficiency Wages

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Author Info
Kugler, Adriana D.
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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3682.

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Date of creation: Oct 2002
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Handle: RePEc:cpr:ceprdp:3682

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Related research
Keywords: efficiency wage models inter-industry wage differentials matching models segmentation social networks unemployment

Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
J68 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Public Policy

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yannis M. Ioannides & Linda Datcher Loury, 2002. "Job Information Networks, Neighborhood Effects and Inequality," Discussion Papers Series, Department of Economics, Tufts University 0217, Department of Economics, Tufts University. [Downloadable!]
    Other versions:
  2. Francois Fontaine, 2003. "Do workers really benefit from their social networks?," Macroeconomics 0311002, EconWPA, revised 07 Jan 2004. [Downloadable!]
    Other versions:
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