Explaining U-shape of the referral hiring pattern in a search model with heterogeneous workers

Abstract

This paper presents a search model with heterogeneous workers, social networks and endogenous search intensity. There are three job search channels: costly formal applications and two costless informal channels – through family and professional networks. Our model explains a U-shape referral hiring pattern observed in empirical studies and a strong selection of workers on productivity across the three channels. Moreover, combining family and professional referrals into one informal channel may generate a spurious result of wage premiums (penalties) if high (low) productivity workers are dominating in the empirical data and their productivity is not fully observable to the econometrician.