This paper presents a search model with heterogeneous workers, social networks and

endogenous search intensity. There are three job search channels available to the unemployed:

costly formal applications and two costless informal channels - through family and

professional networks. The gain from being employed is increasing in the productivity, so

the lowest motivation for preparing formal applications is proved to be among the least

productive worker types. We assume that professional contacts exhibit a strong degree of

homophily, thus it is profitable for firms to direct their network search towards the more

productive incumbent employees. So the probability of a professional referral is increasing in

the productivity of the worker, which mitigates the incentives to use the formal channel of

search. Therefore, the model predicts that workers in the right (left) tail of the productivity

distribution have the highest propensity of finding a job with a help of professional (family)

contacts, whereas the formal channel of search is mostly utilized by workers in the middle

range of the distribution. This explains the U-shaped referral hiring pattern in the model.

The endogenous sorting of workers across channels also implies that professional (family)

referrals are associated with wage premiums (penalties) compared to the formal channel of

search. The average effect of referrals on wages is, however, ambiguous and depends on the

relative proportions of high and low productivity types in the population. These findings help

to explain the contradicting empirical evidence concerning the effect of referrals on wages.