Why do some workers find jobs quickly while others struggle? Why do similar workers get paid different wages? What determines how long a worker stays at their job? To answer these fundamental questions, labor economists seek to better understand the process that connects a worker with a firm.

In surveys of workers and firms, a referral is often cited as an ingredient in this process. However, the precise role of referrals and the implications for labor market outcomes have been unclear, in part because of data limitations. For this paper, we use a new survey to show that the role of a referral — and its effect on workers’ wages and tenure — becomes clear once one distinguishes between different types of referrals, and how each type of referral is used to find different types of jobs. Our new insights could help rationalize a variety of puzzling facts about the labor market.

This article appeared in the First Quarter 2024 issue of Economic Insights. Download and read the full issue.

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