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Explaining the U-Shape of the Referral Hiring Pattern in a Search Model with Heterogeneous Workers

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  • Stupnytska, Yuliia

    (Center for Mathematical Economics, Bielefeld University)

  • Zaharieva, Anna

    (Center for Mathematical Economics, Bielefeld University)

Abstract

This paper presents a search model with heterogeneous workers, social networks and endogenous search intensity. There are three job search channels available to the unemployed: costly formal applications and two costless informal channels - through family and professional networks. The gain from being employed is increasing in the productivity, so the lowest motivation for preparing formal applications is proved to be among the least productive worker types. We assume that professional contacts exhibit a strong degree of homophily, thus it is profitable for firms to direct their network search towards the more productive incumbent employees. So the probability of a professional referral is increasing in the productivity of the worker, which mitigates the incentives to use the formal channel of search. Therefore, the model predicts that workers in the right (left) tail of the productivity distribution have the highest propensity of finding a job with a help of professional (family) contacts, whereas the formal channel of search is mostly utilized by workers in the middle range of the distribution. This explains the U-shaped referral hiring pattern in the model. The endogenous sorting of workers across channels also implies that professional (family) referrals are associated with wage premiums (penalties) compared to the formal channel of search. The average effect of referrals on wages is, however, ambiguous and depends on the relative proportions of high and low productivity types in the population. These findings help to explain the contradicting empirical evidence concerning the effect of referrals on wages.

Suggested Citation

  • Stupnytska, Yuliia & Zaharieva, Anna, 2015. "Explaining the U-Shape of the Referral Hiring Pattern in a Search Model with Heterogeneous Workers," Center for Mathematical Economics Working Papers 511, Center for Mathematical Economics, Bielefeld University.
  • Handle: RePEc:bie:wpaper:511
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    File URL: https://pub.uni-bielefeld.de/download/2712105/2902030
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    References listed on IDEAS

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    Cited by:

    1. Stupnytska, Yuliia, 2015. "Asymmetric information in a search model with social contacts," Center for Mathematical Economics Working Papers 548, Center for Mathematical Economics, Bielefeld University.
    2. Zaharieva, Anna, 2015. "On the Puzzle of Diversification in Social Networks with Occupational Mismatch," Center for Mathematical Economics Working Papers 547, Center for Mathematical Economics, Bielefeld University.
    3. Rebien, Martina & Stops, Michael & Zaharieva, Anna, 2017. "Formal search and referrals from a firm's perspective," Center for Mathematical Economics Working Papers 578, Center for Mathematical Economics, Bielefeld University.
    4. repec:eee:labeco:v:50:y:2018:i:c:p:112-127 is not listed on IDEAS

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    Keywords

    endogenous search intensity; family contacts; professional networks; U-shape; referral puzzle; wage premiums and penalties;

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