Networks or lemons?

Abstract

Past research has argued that hiring personnel use employment as a signal of worker quality. If firms tend to keep high ability workers, then those who are not employed will tend to be "lemons," labor market leftovers who are of uncertain quality. To the extent that employers rely on employment as a signal, then well-qualified, but out-of-work job seekers will be stigmatized simply by being out of work. "Networking" is commonly prescribed as a means for job seekers to overcome the negative signals of being out of work. But for networking to work, someone must be willing to provide a connection for the unemployed person. This begs two important questions: 1) will potential referrers also view unemployment as a negative signal? and, 2) does the willingness to help depend on the strength of the network tie? We design a survey vignette experiment to study how potential referrers react to the signal of unemployment, and how their decisions to refer job candidates depend on whether the potential referral is a friend vs. stranger. We find that referrers generally do react negatively to unemployed job seekers. However, despite the risk to their reputation, friends are more likely to refer the unemployed, and do so without distancing themselves from the unemployed candidate. This suggests that networking can indeed solve the lemons problem confronting unemployed job seekers.