How Much Do Employers Learn from Referrals?

Authors

  • JOSHUA C. PINKSTON

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    •  The author's affiliation is Economics Department, College of Business, University of Louisville, Louisville, KY. E-mail: Josh.Pinkston@louisville.edu. I owe special thanks to Tricia Gladden, Jeff Groen, Anne Polivka, and Kathryn Shaw for helpful comments. I would also like to thank seminar participants at the 2006 SoLE meetings; Florida State University; The University of North Carolina, Chapel Hill; Clemson University; The University of Texas, Arlington; and The University of Louisville. All mistakes are my own.


Abstract

This paper tests the hypothesis that referrals from various sources provide employers with more information about job applicants than they would have with-out a referral. The study uses data that contain information on two workers in the same job, allowing the differences in job and firm characteristics to be canceled out and controlling for the possibility that workers with referrals from different sources (or no referral at all) sort into jobs that put different weights on individual performance. The estimation results are consistent with referrals from current employees providing employers with more information than they would have otherwise. Additionally, it appears as though hiring through friends or relatives of the employer may involve some favoritism that results in employers either collecting less information than they would otherwise or ignoring information when setting wages. The study finds weak evidence consistent with referrals from other firms or labor unions providing useful information, and no evidence that referrals from community organizations or other sources have any effect.

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