The H. Gregg Lewis prize for the best paper published in the Journal of Labor Economics during 2016-2017 has been awarded to Lena Hensvik and Oskar Nordström Skans for “Social Networks, Employee Selection, and Labor Market Outcomes,” which appeared in the October 2016 issue of the Journal.
The Prize Committee consisted of Melvin Stephens Jr (Chair), Marianne Page, and Jessica Pan (previous Lewis Prize winner). Social networks have long been of interest to labor economists and access to administrative data in recent years has allowed researchers to test the theoretical implications of network models. Hensvik and Skans examine the importance of employee referrals in the hiring of new workers. If high quality workers tend to interact with other high quality workers through their social networks then employers can leverage these relationships through referrals in situations where the quality of potential hires is not easily observed. Employee referrals in the presence of networks yield predictions for the quality and wages of new hires as well as for the probability of using referrals in the hiring process. A longstanding hurdle to empirically testing these ideas, however, is information on worker quality that is unobserved by employers but is observed, perhaps imperfectly, by employees.
Hensvik and Skans leverage population register data from Sweden to create a sample of newly hired and incumbent male workers. Worker networks are created through linking spells of overlapping employment at prior employers. Key to their analysis is that nearly every 18 or 19 year old Swedish male underwent the military draft process in which they were subjected to both cognitive and non-cognitive testing with individuals kept unaware of their own test results. Using these test scores, which are available in the register data, along with information on networks through prior employment, the authors confirm the numerous predictions on the impact of referrals through employee networks. The finding that firms hire workers through the social ties of more productive employees has important implications for understanding wage inequality. The use of such employee referral networks implies that greater ability sorting in the labor market will increasingly work to the disadvantage of equally productive workers without access to high-ability ties. The committee was impressed with the authors’ creative use of population register data to study this important topic.