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Referral hiring, endogenous social networks, and inequality: an agent-based analysis

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Abstract

The importance of referral hiring, which is workers finding employment via social contacts, is nowadays an empirically well documented fact. It also has been shown that social networks for finding jobs can create stratification. These analyses are, by and large, based on exogenous network structures. We go beyond the existing work by building an agent-based model of the labor market in which the social network of potential referees is endogenous. Workers invest some of their endowments into building up and fostering their social networks as an insurance device against future job losses. We look into the manner in which social networks and inequality respond to increased uncertainty in the labor market. We find that larger variability in firms’ labor demand reduces workers’ efforts put into social networks, leading to lower inequality.

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Notes

  1. We may also, perhaps more abstractly, refer to number of links instead of using for illustrative reasons the term friends. In the model which we develop, friends have a particularly narrow meaning which, however, does not imply that we are not aware of much broader interpretations.

  2. More evidence on job search through friends and relatives can be found in the excellent survey by Ioannides and Loury (2004) or the comparative study by Pellizzari (2004). Recent contributions on the role of social networks and labor market performance using microdata are Cingano and Rosolia (2008) and Hellerstein et al. (2008).

  3. See Freeman (2002) for how information and computer technologies changed matching employers and employees in labor markets.

  4. See e.g. http://epp.eurostat.ec.europa.eu/.

  5. One of our referees brought to our attention the work by McCloskey and Ziliak (1996) arguing that, besides statistical significance, economic importance should also be reflected. While we fully agree, we would refer at this point to our earlier remark that we develop a quite stylized model for the study of economic mechanisms, which makes a quantitative interpretation of the results less straightforward.

  6. Note that the share of referral hirings in our experiment with an exogenously given friend is higher than in Table 2, even though the average number of friends is roughly the same. The reason is that an average number of friends equal to one in a framework in which friends are endogenous implies that some workers do not have friends at all, while others may have two or more. Those who do not have friends will not get referrals and those who have more than one friend might have more friends than they need to get a referral. Thus, on average, the share of referrals will be lower as compared to the experiment in which all workers have one friend.

  7. Results of these robustness checks are all available upon request from the authors.

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Acknowledgements

We would like to thank Herbert Dawid and Philipp Harting and two anonymous referees for their suggestions, as well as all the participants commenting at the Conference of the Eastern Economic Association in Boston 2008, at the Artificial Economics Conference 2008 in Innsbruck, the conference of the European Social Simulation Association in Brescia 2008, the WEHIA conference 2009 in Beijing, the Tagung des Vereins für Socialpolitik 2009, and at the 2009 Cendef conference in Amsterdam, and at research seminars in Pisa and Münster.

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  1. Department of Business Administration and Economics, Bielefeld University, P.O. 10 01 31, 33501, Bielefeld, Germany

    Simon Gemkow

  2. Free University of Bozen/Bolzano, School of Economics and Management, Piazza Università 1, 39100, Bozen, Italy

    Michael Neugart

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  1. Simon Gemkow
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Correspondence to Michael Neugart.

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Gemkow, S., Neugart, M. Referral hiring, endogenous social networks, and inequality: an agent-based analysis. J Evol Econ 21, 703–719 (2011). https://doi.org/10.1007/s00191-011-0219-3

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