“Good homophily”: When firms hire referred employees, their workforce becomes more likeminded; this can be a positive if workers share values or characteristics that are desirable.

Firms may incur lower recruiting costs when hiring employees via referrals.

Referred employees may have higher productivity than non-referred employees.

Employees that are hired via referrals have lower turnover relative to non-referred employees.

Cons

It is possible that hiring based on employee referrals could disadvantage women or minorities.

Referred employees sometimes receive higher wages relative to non-referred employees, which entails increased costs to the firm.

“Bad homophily”: Firms get employees like their existing employees; for example, firms might get less demographic diversity and/or employees with less diversity in opinions and ideas.

Referral hiring may reflect nepotism; friends and family may be hired instead of the best available candidates.