The Value of Hiring through Referrals
AbstractEmployee referrals are a very common means by which firms hire new workers. Past work suggests that workers hired via referrals often perform better than non-referred workers, but we have little understanding as to why. In this paper, we demonstrate that this is primarily because referrals allow firms to select workers better-suited for particular jobs. To test our model, we use novel and detailed productivity and survey data from nine large firms in three industries: call-centers, trucking, and high-tech (software). Referred workers are 10-30% less likely to quit and have substantially higher performance on rare "high-impact metrics" (e.g. creating patents and avoiding truck accidents), despite having similar characteristics and similar performance on non-rare metrics. To identify the source of these behavioral differences, we develop four new statistical tests, all of which indicate that firms benefit from referrals predominantly by selecting workers with a better fit for the job, as opposed to referrals selecting workers with higher overall quality; to referrals enabling monitoring or coaching; or to it being more enjoyable to work with friends. We document that workers refer others like themselves, not only in characteristics but in behavior (e.g. unsafe workers refer other unsafe workers), suggesting that firms may gain by incentivizing referrals most from their highest quality workers. Referred workers achieve substantially higher profits per worker and the difference is driven by referrals from high productivity workers.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7382.
Length: 66 pages
Date of creation: May 2013
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Find related papers by JEL classification:
- M51 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Firm Employment Decisions; Promotions
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- O32 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Management of Technological Innovation and R&D
- J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
- L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services
- L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
- L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-19 (All new papers)
- NEP-HRM-2013-05-19 (Human Capital & Human Resource Management)
- NEP-LAB-2013-05-19 (Labour Economics)
- NEP-LMA-2013-05-19 (Labor Markets - Supply, Demand, & Wages)
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