Social Networks in Determining Employment and Wages: Patterns, Dynamics, and Inequality

We develop a model where agents obtain information about job opportunities through an explicitly modeled network of social contacts. We show that an improvement in the employment status of either an agent’s direct or indirect contacts leads to an increase in the agent’s employment probability and expected wages, in the sense of first order stochastic dominance. A similar effect results from an increase in the network contacts of an agent. In terms of dynamics and patterns, we show that employment is positively correlated across time and agents, and the same is true for wages. Moreover, unemployment exhibits persistence in the sense of duration dependence: the probability of obtaining a job decreases in the length of time that an agent has been unemployed. Finally, we examine inequality between two groups. If staying in the labor market is costly (in opportunity costs, education costs, or skills maintenance) and one group starts with a worse employment status or a smaller network, then that group’s drop-out rate will be higher and their employment prospects and wages will be persistently below that of the other group.