Job-referral networks can make labor markets more productive
and efficient but may increase the importance of luck in job matches
Social networks, or “job-referral” networks, can help make
labor markets become more efficient. Outside the firm, they help workers obtain employment
after displacement and secure higher-paying jobs. They can also match highly-skilled workers
to more productive employment. Inside the firm, referrals facilitate employment relationships
that are more stable, productive, and profitable. In aggregate, referral networks help “grease
the wheels” of a labor market that can be beset by a range of information problems. However,
such networks can also be segmented along racial, ethnic, and socio-economic lines, which
brings into question the effect they may have on inequality between and within different
groups of workers.
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