By Dr. Eric Fruits,
Econ Minute [5]
Firms often use referrals from existing employees to hire new workers. About 50 percent of US jobs are found through informal referral networks and about 70 percent of firms have programs encouraging referral-based hiring. One can argue that the social networking site LinkedIn [6] is mostly a referral-based job board with more than 250 million users.
Although referral-based hiring has boomed in recent years, there is little quantitative evidence that reliance on referrals is any better or worse than traditional methods of hiring.
Research published in the Quarterly Journal of Economics finds some measurable benefits to referral-based hiring (paywall-protected published article [7]; free pre-publication working paper [8]):
- Referred applicants are more likely to be hired and more likely to accept offers, even though referrals and nonreferrals have similar skill characteristics.
- Referred workers tend to have similar productivity compared to nonreferred workers on most measures, but referred workers have lower accident rates in trucking and produce more patents in high-tech.
- Referred workers are substantially less likely to quit and earn slightly higher wages than nonreferred workers.
- In call centers and trucking, the two industries for worker-level profits can be calculated, referred workers yield substantially higher profits per worker than nonreferred workers. These profit differences are driven by lower turnover and lower recruiting costs for referrals.
If businesses want better employees and workers want better jobs, it may be time to ditch the job board (even if it’s the best job board [9] out there), and hit up the modern version of the Rolodex.