Unemployment Fluctuation and Referral Hiring

Referral hiring has a similar nature to unemployment insurance. An additional channel provided by referrals can shorten workers' unemployment duration due to the increase in the matching probability. Accordingly, referral hiring has the potential to contribute to the business cycle stability. This study examines to what extent referrals affect cyclical properties of the business cycle. Using two representative models with referral processes, I propose a comparison of the dynamics between models with and without referrals. From the impulse response to a productivity shock, it is found that referral hiring does not necessarily reduce the business cycle fluctuations. The key structure leading to the result is whether the referral process passes through the labor market, in particular, there are significant shifts in the dynamics of the unemployment rate.