Coworker network effects on displaced workers

Between 30 and 50 percent of jobs are obtained through personal connections. Social contacts may contribute to reduce the incomplete information faced by workers when looking for a job (where are the good jobs?) or the asymmetric information faced by companies during recruitment (who is a good worker?). Despite substantial evidence on the widespread use of social contacts in various contexts, there is limited evidence on the extent to which they facilitate matching between workers and firms.

This paper investigates the impact of personal connections on the Portuguese labor market. Drawing on detailed data covering virtually all employers and their employees between 1986 and 2013, this analysis focuses on the personal connections that arise from workplace interactions, i.e., coworkers, to provide a comprehensive assessment of the impact of former coworkers on the hiring probabilities and reemployment outcomes of displaced workers.

From a worker perspective, the results indicate that personal connections improve hiring probabilities of displaced workers. The type of connection matters: stronger personal connections as well as connections to managers are more relevant. Moreover, displaced workers with at least one connection in the hiring firm earn higher entry-level wages and enjoy greater job security upon re-employment.

From an employer perspective, the results highlight that personal connections help alleviate the information problems faced by companies when hiring and facilitate the learning process about the worker’s suitability for the job. In this sense, the analysis suggests that the use of referrals limits the need for firms to use alternative screening devices, such as fixed-term contracts. Therefore, these results are also relevant from a policy point of view, as they contribute to the debate on whether fixed-term contracts are primarily used as screening mechanisms or buffer stocks.

Click here to go to the paper by Marta Silva and José Garcia-Louzão.