Closing the Door to Diversity

On the surface, it seems that using staff recommendations when recruiting would benefit both you and those being hired. However, research suggests that while using referrals does result in a lot of positives, it can hurt employers in the long run. A new study published in the IZA World of Labor journal found that continuously tapping into “job-referral networks” can pose problems for employers who are trying to build diverse workforces. Ian Schmutte, the study’s author and an assistant professor at the University of Georgia, said workers who get hired through referrals almost always keep their jobs longer. This suggests that these kinds of recommendations improve the match between worker and employer, Schmutte said.

“So referrals lead to better jobs, where both sides are happier and the jobs last longer,” Schmutte said in a statement. “For firms, it’s more profitable, because they don’t incur the cost of turnover. For employees, there is some evidence [that] those hired through referral earn higher wages.” However, since employees typically refer those who look and act like themselves, this type of recruiting practice can stymie diversity, the study said.

“If this is how most people find jobs, it means that they’re relying on social networks, which tend to be constructed on the basis of social and economic hierarchies that can be based on historic patterns of racial or class stratification,” Schmutte said. “As a result, they can perpetuate inequality or have an ‘old boys’ club’ character to them.” The use of referrals attracts many employers, because they believe it is the most efficient way to hire new employees. “If you’re an employer, you don’t have all of the information you want about a potential worker. You want to know about their character, if they show up to work on time, or are they going to be good at this particular type of task, are they going to fit in with the team, that kind of thing,” Schmutte said. “Referrals can answer some of those questions and reduce the information problems, so economists tend to think that makes the labor market more efficient.” The research argues, however, that while good employees often know and refer other good workers, their networks are often confined to fairly similar social circles. “It’s clear that job referrals are a large share of total employment, and their relevance surprisingly seems to be increasing, rather than decreasing over time,” Schmutte said. “But it’s hard to quantify how much they’re enhancing efficiency versus how much they’re increasing inequality.”