Referrals from a friend really, really matter according to new research by NY Fed economists

The idea that companies only hire the friends of existing workers is a fascinating complaint. Employee referrals do not seem to account for most hiring in America but job applicants referred by an existing worker do have some real advantages - and even some unique disadvantages - according to a new study by economists at the Federal Reserve Bank of New York. New York Fed economists Meta Brown, Elizabeth Setren and Giorgio Topa did an in-depth study into the hiring practices of a very large financial services firm in New York City that also had offices around the world and employs thousands of people. With assistance from the firm's human resources department, they tracked the job application, interviewing, hiring, promotion and pay of job applicants who were referred by an existing employee as well as applicants who were not referred by a friend on the inside. While most workers hired were not referred by an employee, the results were amazing. To start, this firm took 62,127 job applications and hired 340 people (that's just 0.5% of the applicants landed a job at this main location of the company). From those thousands of applicants, just 29% were referred by somebody already working at the firm. Also, on average, 185.2 individual people applied for each position and an average of 6.7 people were brought in for each open job position. People who were not referred and applied to the company via a job board made up 60% of all the applicants but only resulted in 40% of the interviewees and 24% of the hires. By contrast, referred applicants were only 6% of the job applicants but 21% of the interviewees and 29% of those hired. "In other words, the pool of candidates receiving serious consideration increasinly favors the referred over the course of the hiring process," the researchers stated in their report titled "Do Informal Referrals Lead to Better Matches? Evidence from a Firm's Employee Referral System." Another interesting point is that new hires who were referred started out earning 2.1% more money than their non-referred counterparts. But then things get more interesting. The pay difference between referred hires and non-referred hires diminished after 3 years on the job, meaning the non-referred workers caught up to their co-workers who had a friend on the inside. Also, referred workers stay with the company longer -- on the whole. These numbers can be skewed because lower-level employees who are referred stay a very long time with the company. Meanwhile, mid-level workers who are referred stay a normal amount of time with the firm. And referred executives depart the company quickly. It's also interesting to know that referred executive-level employees earn less than their non-referred counterparts. Again, this is all a study from just ONE employer. Nevertheless, this is a comprehensive and revealing look into current hiring behavior. A key issue is how homogenous the referred workers are. The vast majority (more than 70%) of referred workers were the same age, race, ethnicity and even educational status of their friend already in the company. When the New York Times wrote about this study, the final paragraphs of the article cited the human resources department at Enterprise Rent A Car, which tries to use employee referrals but still wants to limit that practice because that company realizes referrals just give more of the same kinds of people and possibly more of the same kind of thinking that is already inside the firm.