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An Equilibrium Labor Market Model With Internal And External Referrals

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  • Youze Lang
  • Youzhi Yang

Abstract

About 40% of workers find their jobs through referrals. We distinguish between two types of referrals based on whether the referrer works at the hiring firm (internal referrals) or not (external referrals). Interestingly, jobs found through internal (external) referrals pay more (less) than those found through formal methods. An equilibrium labor market model is then built by introducing an incentive‐compatible mechanism through which workers can share job opening information. A nondegenerate wage distribution arises in equilibrium with a wage premium (penalty) for internal (external) referrals. When calibrated, our model can capture these salient features of the U.S. labor market.

Suggested Citation

  • Youze Lang & Youzhi Yang, 2024. "An Equilibrium Labor Market Model With Internal And External Referrals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 655-692, May.
    • Handle: RePEc:wly:iecrev:v:65:y:2024:i:2:p:655-692
    DOI: 10.1111/iere.12671
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    References listed on IDEAS

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