Hire My Friend! The Easy Logic (and Hidden Dangers) of Employee Referrals

The downside of a very useful short-cut

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If you're unemployed, this will come as either great news or terrible news -- depending on how much you envy your friends' jobs.

The New York Times reports that referrals from employees make up a growing number of hires at some large companies that face the daunting task of wading through thousands of applications to fill a single position. At the accounting and consulting powerhouse Ernst & Young, nearly half of advanced hires these days were recommended by the company's own workers. (That's up from 28 percent in 2010, and the company's goal is to surpass 50 percent internal-referral rate.) In the what you know vs. who you know tug-of-war, personal connections are pulling stronger. 

It's both utterly predictable for companies and quietly dangerous for workers.

Companies like referrals because they're cost-saving, energy-saving, and people-saving. Picking through hundreds of resumes and cover letters is a tremendous investment of time, money, and human resources labor. Giving weight to internal referrals might not be the most comprehensive way to evaluate potential hires, but it's a not-entirely-crazy short-cut. As much as old-school economics likes to pretend that rational beings relish infinite choices, the research suggests people tend to be overwhelmed by them. What we really relish is taking short-cuts to prune our options. Exhaustive evaluation can be, quite literally, exhausting.

Like any short-cut, this one can lead companies astray. It's conceivable that if you rope off a majority of your hires for internal referrals, you're willfully ignoring applicants who could be superior employees, but happen to lack the arbitrary quality of "knowing Carl from Accounts Receivable." Still, in many companies, the culture-fit factor can matter as much or more than the strategic-fit factor. In other words: It's important to hire people who get along. Friends do count for something.

The greater danger would be to the broader economy. There are nearly 5 million Americans who have been out of work more than six months. These wannabe-workers are more likely to suffer from depleted networks of office buddies and other professional connections. "The more you've been out of the work force, the weaker your connections are," Mara Swan, executive vice president for global strategy and talent at Manpower Group, told the Times.

As more companies turn away from public applicant pools to private worker recommendations for leads on new hires, the long-term unemployed will be even less likely to get interviews, and even more likely to remain unemployed. The Ernst & Young's of the world are well within their legal rights to trust the judgment of their own salaried workers. But an insular professional class, turned inward against the ranks of long-term unemployed Americans, could create a permanently poorer class of Americans whose lost productivity and reliance on government will all of us poorer in the long run.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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