Abstract

This paper develops a model that uncovers novel testable implications of referral-based job search networks in which employees provide employers with information about potential new hires that they otherwise would not have. Using comprehensive matched employer-employee data covering the entire workforce in one large metropolitan labor market combined with unique survey data linked to the social security records, we provide evidence that workers earn higher wages and are less inclined to leave the firm if they obtained their job through a referral.As predicted if firms and workers learn about workers' producitvity with time in the firm, these effects are particularly strong at the beginning of the employment relationship and rapidly decline with tenure in the firm. Overall, our findings suggest that job search networks help to reduce information deficiencies in the labor market and lead to productivity gains for workers and firms.