Abstract
An equilibrium search model of the labor market is combined with a social network. The key features are that the workers' network transmits information about jobs and that wages and entry of firms are determined in equilibrium. When workers are homogeneous referrals mitigate search frictions. When workers are heterogeneous referrals also facilitate the hiring of better workers. Two predictions about the matching efficiency are supported by the data: a higher prevalence of referrals is associated with higher matching efficiency and the efficiency of the aggregate matching function is pro-cyclical.
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