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Information Channels in Labour Markets. On the Resilience of Referral Hiring

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  • Casella, Alessandra
  • Hanaki, Nobuyuki

Abstract

Economists and sociologists disagree over markets’ potential to take over functions typically performed by networks of personal connections. First among them is the reliable transmission of information. In this paper we begin from a model of labour markets where social ties are stronger between similar individuals, and thus firms employing productive workers prefer to rely on personal referrals by their employees than to hire on the open anonymous market (Montgomery (1991)). However, we allow workers in the anonymous market to engage in a costly action that has the potential to signal their high productivity. We study the extent to which the possibility of signalling reduces the reliance on the network. We find that the network is remarkably resilient - only for a small minority of parameter values does the network disappear. The problem is that to be effective signalling must fulfill two contradictory requirements: unless the signal is extremely precise, it must be expensive, or it is not informative; but it must be cheap, or the network can undercut it.

Suggested Citation

  • Casella, Alessandra & Hanaki, Nobuyuki, 2005. "Information Channels in Labour Markets. On the Resilience of Referral Hiring," CEPR Discussion Papers 4969, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4969
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    Cited by:

    1. Tito Boeri & Pietro Garibaldi & Espen R. Moen, 2014. "Financial Constraints in Search Equilibrium: Mortensen and Pissarides Meet Holmstrom and Tirole," CEP Discussion Papers dp1317, Centre for Economic Performance, LSE.
    2. Brändle, Tobias & Grunau, Philipp & Haylock, Michael & Kampkötter, Patrick, 2020. "Recruitment strategies and match quality - New evidence from representative linked employer-employee data," University of Tübingen Working Papers in Business and Economics 134, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    3. Oyer, Paul & Schaefer, Scott, 2011. "Personnel Economics: Hiring and Incentives," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 20, pages 1769-1823, Elsevier.
    4. Alessandra Casella & Nobuyuki Hanaki, 2006. "Why Personal Ties Cannot Be Bought," American Economic Review, American Economic Association, vol. 96(2), pages 261-264, May.
    5. Bengi YANIK-İLHAN & Ayşe Aylin BAYAR & Nebile KORUCU-GÜMÜŞOĞLU, 2019. "How Do Informal Social Networks Impact on Labor Earnings in Turkey?," Sosyoekonomi Journal, Sosyoekonomi Society, issue 27(41).
    6. Francis Kramarz & Oskar Nordström Skans, 2014. "When Strong Ties are Strong: Networks and Youth Labour Market Entry," Review of Economic Studies, Oxford University Press, vol. 81(3), pages 1164-1200.
    7. Ángel L. Martín‐Román & Jaime Cuéllar‐Martín & Alfonso Moral, 2020. "Labor supply and the business cycle: The “bandwagon worker effect”," Papers in Regional Science, Wiley Blackwell, vol. 99(6), pages 1607-1642, December.
    8. Nakajima, Ryo & Tamura, Ryuichi & Hanaki, Nobuyuki, 2010. "The effect of collaboration network on inventors' job match, productivity and tenure," Labour Economics, Elsevier, vol. 17(4), pages 723-734, August.
    9. Christopher T. Stanton & Catherine Thomas, 2016. "Landing the First Job: The Value of Intermediaries in Online Hiring," Review of Economic Studies, Oxford University Press, vol. 83(2), pages 810-854.
    10. Boza, István & Ilyés, Virág, 2018. "A korábbi munkatársak bérekre gyakorolt hatása [The influence of previous employment on wages]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 726-767.
    11. Holzner, Christian Ludwig & Watanabe, Makoto, 2015. "Labor Market Equilibrium with Public Employment Agency," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113097, Verein für Socialpolitik / German Economic Association.
    12. Emre Ekinci, 2022. "Monetary rewards in employee referral programs," Manchester School, University of Manchester, vol. 90(1), pages 35-58, January.
    13. Yang, Lijun, 2018. "Higher education expansion and post-college unemployment: Understanding the roles of fields of study in China," International Journal of Educational Development, Elsevier, vol. 62(C), pages 62-74.
    14. Dhillon, Amrita & Iversen, Vegard & Torsvik, Gaute, 2012. "Employee referral, social proximity and worker discipline," CAGE Online Working Paper Series 90, Competitive Advantage in the Global Economy (CAGE).
    15. Nicodemo, Catia & Nicolini, Rosella, 2012. "Random or Referral Hiring: When Social Connections Matter," IZA Discussion Papers 6312, Institute of Labor Economics (IZA).
    16. Avner Ben-Ner & Matthew Ellman, 2013. "The contributions of behavioural economics to understanding and advancing the sustainability of worker cooperatives," Journal of Entrepreneurial and Organizational Diversity, European Research Institute on Cooperative and Social Enterprises, vol. 2(1), pages 75-100, August.
    17. repec:ehl:lserod:59069 is not listed on IDEAS

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    More about this item

    Keywords

    networks; referral hiring; referral premium; signalling;
    All these keywords.

    JEL classification:

    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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