Employees hired through these networks tend to keep their jobs longer, said lead researcher Ian Schmutte, assistant professor of economics at the University of Georgia (Atlanta), suggesting that this is one way to improve matches between firms and jobseekers.
“Referrals lead to better jobs, where both sides are happier and the jobs last longer. For firms, it's more profitable because they don't incur the cost of turnover. For employees, there is some evidence those hired through referrals earn higher wages."
However, if recruiters use this network too often, diversity in the workplace may suffer as they tend to hire people who look and act like current employees.
He said that while networks exist to address problems in the labour market and addresses intangible issues about the referrals work ethics, this also means that recruiters are 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”.
“As a result, they can perpetuate inequality or have an 'old boys club' character to them. So referral networks can be both efficiency enhancing and also lead to particular types of inequalities,” he said.
In his study, How do social networks affect labour markets?, Schmutte found that organisations are increasingly relying on ‘job-referral networks’ despite the availability of other forms of recruitment.
“In spite of the fact that there are lots of other ways to get information about people, firms are increasingly utilising job-referral networks,” he said.
“That means they're important. But it's hard to quantify how much they're enhancing efficiency versus how much they're increasing inequality."
He added that the research is still in its early phase and would need further studying in order to fully understand the consequences of firms encouraging or limiting the use of social networks to recruit new hires, reported Science Daily.
How do social networks affect labour markets?
was published in the latest edition of IZA World of Labor.
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According to research conducted by the University of Georgia, workers hired through ‘job-referral networks’ such as friends or social acquaintances can perpetuate a culture of inequality within the workplace.