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Social welfare and wage inequality in search equilibrium with personal contacts

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  • Zaharieva, Anna

Abstract

This paper incorporates job search through personal contacts into an equilibrium matching model with a segregated labor market. Firms can post wage offers in the regular job market, alternatively they can save on advertising costs and rely on word-of-mouth communication. Wages are then negotiated ex-post between the firm and the applicant, so the model can generate wage premiums or penalties depending on the parameter of bargaining power. Moreover, this paper shows that the traditional Hosios (1990) condition continues to hold in an economy with family contacts but it fails to provide efficiency in the economy with weak ties. There are two reasons for the inefficiency. First, workers bargaining over wages do not internalize the positive external effect on their contacts, originating from a higher probability of finding a job. This network externality puts an upward pressure on wages so the market tightness in the referral market is distorted downwards. Second, weak ties do not act in full interest of the unemployed worker so their search intensity is inefficiently low. Finally, this paper shows that a combination of a hiring subsidy and a referral bonus can decentralize the efficient allocation in the economy with weak ties.

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Bibliographic Info

Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 23 (2013)
Issue (Month): C ()
Pages: 107-121

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Handle: RePEc:eee:labeco:v:23:y:2013:i:c:p:107-121

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Web page: http://www.elsevier.com/locate/labeco

Related research

Keywords: Personal contacts; Referrals; Family job search; Social capital; Wages; Equilibrium efficiency;

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Cited by:
  1. Tumen, Semih, 2013. "Informal versus Formal Search: Which Yields a Better Pay?," MPRA Paper 50446, University Library of Munich, Germany.
  2. Yuliia Stupnytska, 2013. "Optimal policy and the role of social contacts in a search model with heterogeneous workers," Working Papers 491, Bielefeld University, Center for Mathematical Economics.

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