In my view, the answer is clear - LinkedIn recommendations are more beneficial than reference letters. In fact, I'm always a bit surprised in this day and age when I see a recently written letter of reference, but I do see them.
Here's my thinking:
Reference letters are great but it then becomes your responsibility to get it in the hands of the recruiter or hiring manager (well, on their screen anyway), and that's not always easy to do. Conventional advice is to NOT send it with your resume and cover letter - after all, they haven't even seen your work history yet. To send a reference letter before they've even decided whether you're remotely qualified may come across as a bit premature.
But what if you're a store manager and you've got this outstanding letter of reference from a former district manager who claims you're the best store manager she's ever had? The top sales producer? The best talent manager? A turnaround specialist?
Isn't that something you'd want future employers to see early on in the application process?
Absolutely, and if that's the case you'd be smart to integrate it into your resume - but that's another story (and it may not be possible to fit everything you'd like into your resume).
If you've got a glowing reference letter from a former supervisor who thinks you're the brightest star in the galaxy, you definitely want the recruiter to see it ASAP. You don't want to sit back and hope that they contact you, screen you, interview you, and then finally ask if you have any references (which is when it usually comes up).
You may not get to that point.
You want them to see it as soon as possible because third-party recommendations from people in authority carry weight. It's more believable if a former supervisor says you're talented than if you say so yourself, so you don't want to hold back and hope you get a chance to pass along a reference letter. You want them to have access to it NOW.
That's why LinkedIn recommendations are much better. They are already "out there" - they're on your profile for everyone to see, regardless of whether you've even applied for a job or had an interview. Recruiters might see them before they even see your resume, if they've stumbled across your profile, and they might be intrigued enough to reach out.
So instead of your glowing recommendation being a footnote at the end of the application process, it could be the spark that starts the whole thing. And that may result in more opportunities for you.
I recommend that you get as many quality recommendations as you can for your LinkedIn profile and direct recruiters to them whenever you get a chance. It may be just what you need to be considered a top candidate.
Best of luck!