Do Informal Referrals Lead to Better Matches? Evidence from a Firm’'s Employee Referral System

The limited nature of data on employment referrals in large business and household surveys has so far restricted our understanding of the relationships among employment referrals, match quality, wage trajectories and turnover. Using a new firm-level dataset that includes explicit information on whether a worker was referred by a current employee of the company, we are able to provide rich detail on these empirical relationships for a single mid-to-large U.S. corporation, and to test various predictions of the theoretical literature on labor market referrals. We find that referred workers enter at higher wage levels, all else equal, but that the referred wage advantage dissipates by the third year of employment. After the fifth year the referral-wage relationship is reversed. Referred workers experience substantially less turnover, and this effect is relatively long-lasting. Despite higher predicted productivity for referred workers in the theoretical literature, we find, if anything, slightly slower promotion rates for referred than for non-referred workers. Finally, the wide range of skill and experience levels represented in this corporation permit detailed analysis of the role of referrals for workers from support staff to executives.