The Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency. Mismatch in the Low-Wage Labor Market: Job Search Perspective . Why Are Informal Referrals So Important?


  • Informal network referrals represent an inexpensive and efficient method of job search.

There are many factors that might help explain the preference for particular job search methods over others. For example, search methods vary in the costs and time investments that they demand, as well as in the applicant pools that they draw. Thus, promising search strategies might be viewed as those that produce a good pool of job candidates with limited expenditure of time or effort on the part of the employer. Especially for jobs that do not demand a college education, employers prefer inexpensive search strategies that demand little of their time.(50)

An informal referral strategy is an inexpensive and efficient method of job search. Although some of the other methods are equally inexpensive on the front end, employers who rely on referrals can exert control over the size of the applicant pool (by limiting the number of referrals they accept and requesting referrals from a select group of their best workers), thereby increasing the efficiency of the search and selection process. Other inexpensive search methods like direct applications and help-wanted signs and more expensive approaches like media advertisements are all likely to produce much larger applicant pools (especially during periods of high unemployment), the sorting through of which may ultimately prove to be a significant time investment for employers.

  • Informal referrals also serve an important applicant screening function, which employers believe improves the quality of job applicants and the efficiency of the recruitment process.

In addition to reducing the size of the applicant pool, the informal referral process results in a pre-screened pool of job applicants, which may improve the efficiency of the search by affecting the quality of the candidate pool.(51)  Rather than an employer screening each candidate's application "cold," as is the case with direct and walk-in applications as well as applicants found through advertisements, candidates who are referred via an existing employee have already been through an initial screening process by the referring party.(52)

The screening carried out by a firm's employees may be considered especially reliable by employers for a number of reasons. Employers apparently feel that it is in their workers' own self-interest to refer the most qualified candidates — as poor quality referrals might reflect negatively on the referral source. In addition, employers report that they expect their employees to be embedded in social networks of similar others, and therefore referred applicants are deemed qualified by association. Moreover, referring employees — who are familiar both with the job and with their social network members — are believed to be in a unique position to evaluate the "fit" of an employee with a workplace, and may therefore be able to best assess a candidate's promise.(53)  Thus, the extent to which employers take advantage of the various search strategies may not only have to do with the front-end cost of the search method, but also the perceived benefits of the method in terms of how well it is able to screen the kinds of applicants an employer seeks.

This screening function provided by informal referrals may be viewed as particularly valuable to employers who seek candidates with few formal skills but with strong "soft skills," such as the ability to get along with coworkers and customers and desired work habits (e.g., punctuality, willingness to take supervisor orders).(54)  Because worker qualifications such as these are highly valued yet difficult to infer from employer-administered skills tests and educational credentials, an informal referral from an existing employee who possesses these traits may be a useful proxy given the lack of a more diagnostic screening procedure.(55)  Moreover, because social networks themselves tend to be racially and ethnically segregated, informal network referrals may be one way in which employers who prefer hiring workers from a particular racial or ethnic group can implicitly screen for the race and ethnicity of their applicants. Thus, the informal referral is viewed as a valuable means of screening a candidate's qualifications and competence and may be one manner in which employers can subtly exercise group-based preferences.

Although formal organizations like public and private employment agencies also perform an initial screening of applicants, employers may have less confidence in the formalized screening process as compared with that which occurs "naturally" within informal networks. Employers, especially those who are looking for workers with limited formal skills but strong soft skills, may be concerned about the quality of referrals sent from organizations that rely primarily on objective screening criteria.

Moreover, employers may also mistrust formal employment agencies because of concerns regarding the applicant pool these organizations typically serve. Formal organizations often serve disadvantaged groups whose members are believed to be poorly prepared for the labor market (e.g., unemployed job seekers, welfare recipients, urban youth) and toward which society holds generally negative attitudes. As a result, there may be a stigma attached to candidates referred from such places, leading employers to avoid them. For example, a referral from a welfare office may increase the saliency of an employers' preconceived beliefs about the work skills and qualifications of welfare recipients in general, which may in turn predispose employers to act unfavorably toward such organizations. Similar arguments have been made about employer attitudes toward the public employment service and voucher programs that provide tax credits to employers who hire workers from targeted groups.(56)  Such signals about the quality of a "typical referral" from a particular organization may or may not be accurate on average, but because many employers shun these services, even the most qualified candidates who rely on formal organizations will be disadvantaged in the hiring process. Although informal referrals may also be drawn from a generally disadvantaged group, employers apparently believe that, compared to formal organizations, their existing employees are both more motivated and more able to effectively differentiate qualified from less-qualified candidates.